IOU Letter Format: Everything You Need to Know

An IOU letter format is the suggested way that a rather informal agreement between two parties should be put down in writing. It is the only guide to the particulars that an IOU should include, because an IOU can be as simple as words scribbled on a napkin, which is the way most people think of the document. Its simplicity, however, should not give the impression that it is not legally binding or has the same standing in a court of law as an intricate contract drawn up by a team of lawyers.

Basically, an IOU, an abbreviation for the words “I Owe You,” and more formally known as a “Debt Acknowledgement Form,” is one party’s pledge to repay a debt to another party. It typically is used when two parties have a level of trust between each other and can essentially break that pledge down to one phrase.

Essentials of an IOU

The principles behind an IOU are that it should be made as simple as possible and not require an extensive background in contract law. It is best, however, that it includes the following important information:

• Name of the debtor.
• Name of the creditor.
• Amount of money in question (written out in both words and numbers).
• When the debt will be repaid. If the debit will be paid back in installments, the amount of each installment and payment dates should be made clear.
• If interest is to be charged until the debt is repaid, the details of how the interest is calculated should be spelled out.
• Signatures of both parties. To be a legally binding document, this is a necessity.
• Signature of a witness. Some states actually require that the IOU be notarized in the presence of a witness.

Although an IOU tends to be a pretty informal agreement made between family members or friends and acquaintances and the idea of charging interest may feel a little awkward, it can be a good idea for a few reasons:

• By lending money, you are losing the opportunity to put it to use in another, more productive way. You shouldn’t be penalized for your generosity, and depending on how long the debt is outstanding, inflation can actually mean your money is worthless when the debt is repaid.
• People often agree to provide an IOU with the best intentions of repaying the debit. However, as everyone knows, if there isn’t a pressing need to pay it off, other expenses can supplant it in terms of importance. If a person knows that if the longer the debt is outstanding the more they will actually be paying, chances are the IOU does not get moved to the bottom of the pile.
• That doesn’t mean you should charge an exorbitant amount of interest. In fact, many states consider interest rates of more than 20 percent to be illegal due to predatory lending statutes.

Why Take an IOU? Isn’t a Promise Enough?

As stated above, an IOU is typically an agreement between friends or family, so you might be tempted to take a person’s word that they will repay the debt. If it’s only a small amount of money, that might be okay, but if the debt is for a rather substantial amount, getting an IOU just makes sense.

• Both parties have a written record of the amount in question and when the debt will be repaid. Memories can grow cloudy, and having the amount of the transaction written down helps avoid any misunderstandings that might arise in the future.
• You can actually sell the IOU to another party if you find yourself in need of cash flow. You may only get pennies on the dollar, but you never know when an emergency may arise.
• It can help avoid embarrassing interactions between parties that sometimes happen when there is an outstanding debt based only on an oral agreement.

IOUs are simple agreements, but they do provide a sense of security on the part of the lender and establish a written obligation on the part of the borrower. Perhaps Shakespeare’s wise advice, “Neither a borrower nor a lender be,” should have the addendum, “unless you use an IOU.”

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