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How an IOU Works

An IOU is an informal way of acknowledging that you owe someone something. It does what it says on the tin, actually: IOU stands for “I owe you”. For formal transactions, one normally expects a contract or agreement that states the terms of the transaction. In many cases, though, formality is not needed. Informal agreements usually require no more than an IOU, which may be in written or verbal form.

For example, if you borrow money from your grandfather, it is not necessary to have a formal contract drawn up and notarized. In fact, a verbal agreement that you will pay the money back will suffice most of the time. This verbal agreement can be considered an IOU. You can take it one step further and put it down in writing. Something as simple as “I promise to pay this sum back” is already considered an IOU.

When coming up with an IOU, witnesses are not necessary. More so, writing down the amount owed constitutes an IOU. Unlike contracts, there are no repayment terms required. Due dates and repayment durations are also not required in an IOU.

Because of the informality of an IOU, it is difficult to use it in court. If someone owes you money and there is no agreement other than an IOU - verbal or written - you might be hard pressed to collect on the debt. More so, debts that involve IOUs are usually so small that having to go to court to collect on them is not worth the time, effort, and money.

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