What is an IOU?

Many financial transactions are so routine and informal that a legal contract would seem like overkill. Instead, a number of people prefer to use a less complicated method called an IOU. An IOU, which can be in written or verbal form, is an informal acknowledgement of a small debt, usually between friends, co-workers or family members. An employee who borrows some change from a petty cash fund, for example, may write an IOU to account for the money.

The name IOU comes from the literal phonetic spelling of "I Owe You." When writing out a formal note acknowledging a debt, the debtor often found it much easier to abbreviate "I owe you..." to IOU. Even though the origin of the abbreviation is English, other countries also recognize the meaning behind an informal IOU.

An IOU is not the same as a formal promissory note or other financial contract. There are rarely any witnesses to the drafting of an IOU, and the repayment obligations may or may not be spelled out directly. Enforcing an informal IOU in court may prove to be difficult, since the document may not be notarized or even acknowledged by the debtor. An IOU is considered an acknowledgement of a debt, but the sum total may be so negligible that legal collection actions would be counterproductive.

Because an IOU is not always legally binding and the repayment terms may be non-existent, lenders and borrowers should consider limiting the amount of any loan secured by an IOU. Anything above a friend or family member's comfort zone should be secured with a more formal promissory note, not an informal or verbal IOU. An IOU is primarily used as a financial placeholder for small debts or nominal payments.

In certain gambling circles, a losing better may ask for a special IOU called a marker to insure repayment to the casino. Periodically, the casino or other lender may decide to collect on this IOU, especially if the gambler happens to win a large sum of money elsewhere. Casinos and other gambling outlets routinely hold a significant number of IOU markers from habitual gamblers.

In short, if you are not sure whether the transaction is a loan or a gift, it may be best to ask if an informal IOU is necessary. The lender may not even bother to collect on the IOU, but at least both parties have recognized a debt and have some written record of the transaction.