What is an IOU?

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  • Written By: Michael Pollick
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 August 2019
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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 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 the term.

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 agreement like this in court may prove to be difficult, since the document may not be notarized or even acknowledged by the debtor. It 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 in this way. Anything above a friend or family member's comfort zone should be secured with a more formal promissory note, not an informal or verbal agreement. An IOU is primarily used as a financial placeholder for small debts or nominal payments.

In certain gambling circles, a losing bettor may ask for a special IOU called a marker to ensure repayment to the casino. Periodically, the casino or other lender may decide to collect on this marker, 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 a person is not sure whether a 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 debt, but at least both parties have recognized it and have some written record of the transaction.


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Post 6

The Bank of England should have read this definition before telling the world in 2014 that bank money is an "I.O.U."...

Post 5

I am a carpenter. My partner and I worked for two weeks at a customer's home. She said she was pleased with our work, as we do very good work, and then said she she did not have the money to pay us. It was obvious by her home that she did have money.

We asked her for an IOU for our $1,600 bill. Now, she ignores our requests to pay and I really cannot afford to go to court. If I do, does she bear the burden or the legal costs to get our money back? She has since hired more people to fix the area around her huge swimming pool and does not seem to be short of money.

Post 4

What if someone already owes me a lot of money and I want him to sign something in front of a notary to make sure it is noted legally.

Post 3

It's also been suggested that IOU stands for I Owe Unto and Is Owed Unto.

Post 2

That little written reminder - even if it seems silly - I have had friends borrow money from me and I have borrowed money from friends and I am always the only one who remembers! (And it's usually when I borrow money from them, so it's not like they're trying to cheat me). I'll go to pay them back and they just stare at me because they don't remember that I borrowed the money in the first place.

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