An IOU (I Owe You) is a legal document that sets out the details of a loan made between a borrower and a lender. The note clearly outlines the borrower’s commitment to fully repay the lender.

Table of Contents

What Is an "I Owe You"?
When Do You Need an IOU?
How to Write An IOU Letter
Differences between an IOU, Promissory Note, and Loan Agreement
I Owe You Sample

What Is an “I Owe You”?

An IOU is a written debt acknowledgment form that includes a promise to repay the debt owed. This document recognizes a legally binding relationship between the borrower and the lender.

It includes the loan transaction’s terms and conditions and ensures the parties have a thorough written record of the deal and their intentions. The parties should finalize the note before any money changes hands.

When Do You Need an IOU?

An IOU allows both parties to record the borrowed money and clarify when the borrower should repay the loan. It’s useful for loans between family, friends, and colleagues and reminds the parties involved of the loan details.

Here are some everyday situations when parties might use this document:

Splitting Bills: If roommates split bills, the party who paid for an expense (like rent or groceries) may distribute an IOU to the other parties. The IOU would ensure that the other parties acknowledge their portion of the expense and agree to pay for it later.
Making Personal Loans: Individuals may use an IOU when lending money to family members or close friends.
Collecting Advance Payments: Businesses may use an IOU when they receive an advance payment for goods or services they’ll deliver or perform later.
Borrowing Items: Sometimes, a lender may create an IOU for a valuable item (like an electronic device or piece of equipment) that a borrower borrows. This document records the item’s condition, description, and value. It also declares that the borrower will return it by a certain date.

How to Write An IOU Letter

Step 1 – Fill in Loan and Party Details

The first step is noting the basic information of the parties involved and the loan amount. Record the lender’s and borrower’s names and the title loan amount before applying interest.

Step 2 – Include the Payment Information

Detail how the borrower will pay back the IOU. There are multiple options available to the lender:

Installment Payment: With an installment payment option, the borrower repays the lender in a set number of installments over a set period specified in the document.
Installment Payment with a Final Balloon Payment: This is the same as an installment payment plan, with the addition of one large “balloon” payment the borrower must pay on the final due date.
Due on a Specific Date: The total payment is due on a date the lender specifies.
Due on Demand: The borrower repays the lender upon their request in a lump sum payment.

Step 3 – Set the Interest Rate (Optional)

If you lend money to another party and would like to be compensated for giving a loan, you can specify that you would like the borrower to pay back the debt with accrued interest.

The maximum interest rate is governed by state law, so it is best to check your state for the maximum interest rate you can set in a loan transaction.

Step 4 – Note the Cosigner or Guarantor (Optional)

If you want assurance in receiving your money back, you can specify the borrower needing a cosigner or guarantor. If the borrower cannot find one, they will be fully responsible for paying back the loan.

An example of where to include guarantor information in an IOU

Step 5 – Include Other Terms

To further protect both parties, you should include terms including but not limited to the following:

Successors and Assigns
- Clarify if others have the ability to take on the lender’s and borrower’s obligations.
Joint and Several Liability
- Name the debt obligations that all borrowers share.
Amendment
- Explain the ability to amend the IOU’s terms and the requirement for approval from both parties to implement the proposed changes.
Severability
- Explain that unenforceable or invalid terms will not affect the other valid terms. The parties can still enforce the valid terms.

Step 6 – Specify the Governing Law

Write down your resident state. Remember that in the event of a dispute, the court will proceed under the state’s laws noted in the IOU unless the parties agree to another governing jurisdiction.

An example of where to include governing law details in an IOU

Step 7 – Sign the Document

Include the signatures of all parties involved. If there is a cosigner or guarantor, they must include their signature too.

An example of where to include signatures in an IOU

Differences between an IOU, Promissory Note, and Loan Agreement

Learn about the differences between an IOU, promissory note, and loan agreement below:

Aspect	IOU	Promissory Note	Loan Agreement
Complexity	The most informal and least complex of the three.	It's more formal and complex than an IOU but less formal and complex than a loan agreement.	The most formal and complex of the three.
Content	It describes the amount owed and includes the borrower's signature. It may have other elements depending on the parties' attention to detail.	It typically includes the borrowed sum, interest rate, repayment date, and the borrower's signature.	In addition to the details in a promissory note, a loan agreement also contains information about the collateral (if applicable), default terms, and other legal provisions.
Legal Enforceability	It's the most challenging to enforce in court because of its ambiguity.	It's typically enforceable in court.	It's the easiest to enforce in court because of its detailed nature.
Use Cases	It's most common for individuals to use this document when loaning small sums to family and friends.	Individuals can use this document for business or personal loans.	Individuals and businesses use this document for mortgages or other more complex loan arrangements that involve larger sums of borrowed money.

I Owe You Sample

Download an I Owe You template in PDF or Word format below:

i owe you (iou) template

I Owe You (IOU) Template