How Does the IOU Work in The US?

Whether for business transactions or simply lending money, it is important that you have an IOU as proof of existing debt. Although an IOU is not considered a legally binding commitment, it is usually followed by a more formal written agreement that contains all the terms relating to the contract. As an individual, it is important that you understand how an IOU works, in your country.

What is an IOU in the US?

person signing an IOU

IOU is an acronym for the words “I owe you,” which is an indication of the fact that a debt exists. Essentially, it comes into play when two individuals perform a transaction that involves money. The term IOU dates back to the 18th century and are still in use today, for both business purposes and also in bookkeeping, where it refers to account receivables.

Taking a deeper look, an IOU is a document that records debt and informal agreement that a party makes to pay another party. Except followed by a legal contract document, the IOU is not legally binding, therefore, making it hard to enforce in court. Also, an IOU is not a negotiable instrument, therefore, it cannot be transferred as a means of payment like checks, money orders or promissory notes.

How to write an IOU?

There is really no standard way, format or terminologies that exist for writing an IOU, however, there are certain minute details that should be included on the document. This includes:

  • The date of the agreement
  • Amount of debt
  • repayment date
  • List of parties involved

To come up with a comprehensive IOU document, here are some other things you should consider including:

  • How the debt is supposed to be repaid, whether in a lump sum or in installments
  • A repayment schedule that captures the size, and frequency of payments when it’s in installments
  • Whether there are any interests charged, and if there is, at what rate
  • A debt guarantor
  • The state laws governing that agreement
  • Signature of the lender and borrower.

If you’re a little lost on how to go about creating the document, you can visit online channels for templates that would make your job so much easier.

What recourse does the lender have?

Although written with lots of information, the IOU is not legally binding. Instead, it outlines the basics of a loan agreement and in the case of future references. As a lender, your best bet for recourse is to legally oblige your debtor to pay up.

However, if you have not agreed on a contractual agreement that usually comes after an IOU, you cannot go through the legal channel. At this point, you as a lender become at the mercy of the borrower, and this is one of the reasons why people always follow up an IOU document with an actual contract. Discussing with your lawyer would perhaps open you to more possibilities on how you can get your money back the right way.

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