What is an IOU

The initials IOU stem literally from the phonetic spelling “I Owe You.”  But since the word “You” does not correspond to the letter U at the end, a grammatically correct term is “I Owe (d) Unto.”  Whichever term you want to use, an IOU is an acknowledgment to pay your debt.

What is an IOU? It is a way of promising another person that you will pay him for the money you borrowed. Since drawing up a legal contract is tedious and costly, an IOU is used for more routine and informal financial transactions. The amount of debt is often small.

Who can issue an IOU? Anyone can issue this informal promise to pay a debt. An IOU is usually between family, friends and co-workers. Employees borrowing from the company’s petty cash issue IOUs, too. In gambling circles, IOUs come in the form of markers. It is not uncommon for casinos to have a number of IOUs from habitual gambling patrons. For as long as the lender is willing to lend the money without the need for a legal financial contract, an IOU can be used.

What form does an IOU take? An IOU can either be verbal or in written form. There is no exact format for a written IOU. The type of paper used is also of no consequence. Some even write their IOUs on cocktail napkins! Below is the suggested information that you should put in any written IOU. Some just write the lender’s name, borrower’s name and amount of debt.

  • current date
  • your full name
  • the name of the person you are borrowing from
  • the amount of debt
  • date when you will repay the debt
  • your signature and that of the debtor
  • optional: name and signature of a witness, if any, and the mode of payment

What is the difference between an IOU and a formal promissory note or a legal financial contract? An IOU is not legally binding. IOUs are informal promises to pay for a debt that do not require witnesses. The repayment terms need not be discussed or written directly. It is not a notarized document making it difficult for the legal courts to enforce an IOU. Since the amount borrowed is often small, collecting the debt via legal action may prove more costly and counterproductive.

When is an IOU issued? An IOU is issued when the amount being borrowed is nominal. This is because it makes no sense to use legal instruments for an amount so small. The issuance of an IOU is based on the lender’s comfort zone. If the amount being borrowed goes beyond a lender’s comfort zone, a formal promissory note should be put in place instead of a verbal or written IOU.

An IOU, derived from the expression “I Owe You” or “I Owe Unto“ is not a negotiable financial instrument. Whether verbal or written, it is simply an acknowledgement of a small debt. The repayment terms are not normally included in an IOUs. The basic information found in an IOU are the debtor’s name, the creditor’s name and the amount borrowed. Next time someone borrows money from you which is beyond your comfort zone, opt for a formal promissory note or notarized contract if you want to get the money back.


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