What does an IOU mean?

The letter “IOU” stands for “I owe you,” and the word “IOU” is a document that admits a debt.

People usually consider an IOU a friendly letter of agreement rather than a legally binding promise. Even though they were first used in the 18th century, IOUs are still used today. Two people doing business together may follow up on an IOU with a more official written agreement.

The Way an IOU Works

On the spur of the moment, like at the end of a business meeting, IOUs are often made as a memorandum of purpose. After these talks, a more official written agreement or contract is often made.

An IOU doesn’t have a standard structure or set of words. Some things that should be in it are the date of the deal, the amount of the debt, the date it is due, the names of the people involved, and the borrower’s signature. But often, details like the amount of interest due, the type of payment, the payback plan or schedule (including the exact date the last payment is due), or the consequences for not paying are not included.

There may be some doubt about whether the IOU is a binding (legally enforceable) deal and whether it has much weight in court because it is not a formal document. Because of this, it might be harder to go to court over not paying with an IOU than with a promissory note or a bond indenture, which are more official agreements that deal with debt.

Because of this, an IOU isn’t usually seen as a negotiable asset, which means it can’t be given to someone else, sold to someone else, or traded on the open market.

Now, though, you can download legal forms for IOUs that show you what information a well-written one should incorporate. That might make it easier to follow through on IOUs and prove them in court.

What an IOU looks like

Let’s say Smithco Bricks orders raw materials but doesn’t have enough cash to pay for the whole order when it comes. It gives an IOU and a down payment, offering to pay for the rest of the raw materials within 30 days, with or without interest. This could work well for both since Smithco regularly does business with the provider.

People have heard the phrase “IOU” so often that it appears in other situations. For example, a bond offering is sometimes known as an IOU. In a casual setting, accounts receivable may be called “IOUs.”

Unique Things to Think About

An IOU is one way for a bookkeeper to record a debt that is still due. So, the note is a piece of accounts receivable and is shown as an asset on the balance sheet. How it is recorded depends on how long it lasts.

The note is a current asset if the money is due in less than a year.

It is called a long-term asset if the payment is due more than a year from now.

Note of Promise vs. IOU

IOUs and promissory notes are a lot alike. There is debt in both of them, and each party promises to pay back the other a certain amount of money on or before a specific date.

What makes them different is that the promissory note is more official and complete than the IOU. It not only says when the debt is due, but it also lists other details about how to pay it back, like the interest rate, payment schedule, amount of payments, and sometimes penalties for paying late or not at all. The words “promissory note” must be written in the text. The investor and the borrower sign the note, often witnessed and notarized.

To sum up, promissory notes are more precise and more grave than IOUs. You can still break them, but not as much as a loan deal or contract. However, they tend to do better in court. Indeed, promissory notes are often found with mortgage or student loan deals; signing this note makes the borrower legally obligated to repay the loan.

Promissory notes can be used as negotiable instruments if the rules are clear.

People who issue promissory notes should know that the state sets the time limit for starting a lawsuit for nonpayment on a promissory note. Statutes of limitations can be anywhere from three to fifteen years. The timer starts running after the first breach. On the other hand, some judges have said that each missed payment has its own statute of limitations, beginning when payment is late.1

FAQs about the IOU

What does an IOU mean in money?

An IOU is a written, but primarily unofficial, agreement between two people that they owe each other money. It says how much the borrower pays the lender. After the client signs it, it typically lists the due date and doesn’t go into great detail about the payment plan or interest rates. It can’t be given or sold to someone else, and if the user doesn’t pay, the lender doesn’t have many legal options.

What does an IOU look like?

Karen P., a close friend of Amanda T., needs $1,500 in cash for a security fee on a new apartment. She must put down the money immediately but she won’t have enough for a few months. Amanda wants to help Karen but also needs proof that she loaned her money to her friend.

Amanda writes on paper that Karen owes her, Amanda T., $1,500 and that Karen will pay it back on April 1, 2021, three months from now. Karen puts her name on the paper. In this way, Karen gives Amanda a legal promise to pay back the $1,500 she borrowed.

How do I make an IOU?

IOUs come in a lot of different kinds. On any paper, even a cocktail napkin, either person can type or write it by hand.

An IOU should have at least the borrower’s name, the lender’s name, the amount of the debt, the date it was made, the date it is due, and the borrower’s signature. It is also suggested that IOUs include the following:

How the debt will be paid back (all at once or in parts)

A repayment plan, including the amount and number of payments if they are made over time

• How much interest is paid, if any?
• A person who will guarantee the loan if there is one
• The country whose rules govern the deal
• Signed by the lender
• There are more and more IOU examples and forms that can be found online.

Is an IOU a legal document?

It is possible to present an IOU in court as a legal document, but it is not always clear if it is binding. Some government officials think an IOU isn’t binding; it’s just a statement that there is a debt. Some people think it’s binding, but it’s unclear if it can be used.

Generally, an IOU is more likely to be enforced if it is more specific. If there aren’t many details in an IOU, it is harder for a court to determine the principals’ duties and rights or who they are.

Is it necessary to have an IOU notarized?

You don’t have to have an IOU notarized. However, some lawyers think that putting a notary’s sign on an IOU makes it more official, which means it’s more likely to be enforced. Indeed, it makes the agreement official by showing that a third party saw it. This makes it more likely that the lender would win in court if there were a disagreement over nonpayment. An IOU is more like a promissory note when notarized, making it a more official document that must be followed.

Conclusion

• When someone writes that they owe money to someone else, that’s called an IOU.
• A more official written contract may follow an IOU in business deals.
• Because the IOU isn’t formal, it can be hard to maintain and rarely possible to sell or trade.
• When working with money, “IOU” is also used to discuss accounts receivable.
• IOUs are not as official as promissory notes but are still legally binding.