An IOU, or “I Owe You”, is used by someone borrowing money (the “borrower”) to officially document that they owe someone (the “lender”) a debt.
While an IOU is less formal than a promissory note, it is still a legally binding document that can be used in court, if necessary.
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1. What Is an IOU?
An IOU is a written promise to repay a debt owed. Like a promissory note, this document recognizes a legally binding relationship between two parties — a Lender and a Borrower.
As a reference, people often call this form by other names:
- “I Owe You” Form
- Debt Acknowledgement Form
- Registered Warrants
Sample IOU
The IOU Sample Form below is a contract between “Lender” Peter Wilson and “Borrower” Luke Dodson. Luke promises to pay Peter back the principal sum of $2,5000 by July 04. If Luke does not make the payment by July 04, he will have to pay a 10% late fee.
A Lender and Borrower are also known by other names:
Lender | Borrower |
|---|---|
| Seller | Buyer |
| Payee | Payer |
| Obligee | Obliger |
| Promisee | Promisor |
| Holder | Debtor |
| Bearer | Endorser |
| Service Provider | Customer |
| Creditor | Debtor |
An IOU is similar to a promissory note and a loan agreement, but it is usually not a negotiable document, and does not contain details about repayment and consequences of not repaying.
Here is a simple chart explaining the difference between an IOU, promissory note, and loan:
IOU | Promissory Note | Loan |
|---|---|---|
| promise to pay | promise to repay | promise to repay |
| steps for repayment | steps for repayment | |
| timeline to repay | timeline to repay | |
| legally binding | legally binding | |
| signature of borrower | signature of borrower | |
| signature of lender | ||
| repay in installments | ||
| consequences of defaulting (i.e. right to foreclose) |
2. When Do You Need an IOU?
An IOU allows both parties to record the amount of money borrowed and clarify when the money should be repaid. Even if you are family, friends, or colleagues, it helps everyone remember exactly how much money was borrowed in case memories fade.
Here are some common situations when this document may be needed:
- You have done business with someone in the past and are willing to take an IOU
- You do not have enough for an item so you give an IOU for the remaining amount
- You want to borrow money for a down payment for an event like a wedding or party
3. The Consequences of Not Using an IOU
What happens if I do not have one?
A basic IOU clearly spells out how much money was borrowed, as well as when it should be repaid and with interest, if any.
Without this document, either the lender or the borrower may become frustrated if the other party does not fulfill his or her promise to give money or repay money.
Here is a chart of some of the preventable suffering an IOU could prevent:
Lender | Borrower |
|---|---|
| Unable to enforce a verbal promise | Unpaid expenses |
| Expensive lawyer fees to: 1. defend undocumented promise to pay 2. recover money unpaid | Expensive lawyer fees to: 1. demand undocumented promised money 2. pursue money promised |
| Loss of friendship or family trust | Loss of friendship or family trust |
| Personal safety & wellbeing | Personal safety & wellbeing |
4. The Most Common IOU Relationships
Who needs to use an IOU?
Anyone lending or borrowing money for business or personal reasons should use a written form to protect themselves from unnecessary headache. Further, lenders and borrowers do not have to be individuals. Because of the debt crisis, governments like Greece could even issue temporary IOUs or “scrip” for its outstanding debts. Also known as “registered warrants”, these documents help the government conserve cash for outstanding debts.
Legal Templates provides a free IOU template for everyday situations where you want a written record that money was borrowed or loaned.
5. What Should You Include in Your IOU?
A simple IOU will identify the following basic elements:
-
- The “Amount”: the amount of money being borrowed
- The “Due Date”: when the Borrower should pay back the Lender
- Name of “Lender”: the party giving the money and will get repaid
- Name of “Borrower”: the party receiving the money and will repay the Lender
If you are thinking of lending money to a friend or family member there are other, more formal options than this form including a promissory note or loan agreement. Learn the difference between an IOU form, a promissory note, and a loan agreement.