An IOU is a short signed document in which one person acknowledges owing money or goods to another, and to write an IOU that will actually protect you, it needs to name both parties, state the exact amount, set a due date, describe how repayment will happen, and carry the borrower’s signature. Everything else, from interest to collateral to witnesses, is added protection layered on top of those basics.
The Core Details Every IOU Needs
Start with the full legal names and current addresses of both parties. Use the name that appears on a driver’s license or government ID, not a nickname. If a dispute ever lands in court, you need to prove exactly who signed.
State the amount owed in both words and numbers. Writing “One Thousand Dollars ($1,000.00)” prevents anyone from altering the figure later, and if the words and numerals disagree, courts typically treat the written-out amount as controlling. For debts involving goods or services rather than cash, describe the items in enough detail that a stranger reading the document could identify what’s owed.
Include two dates: the date the IOU is created and the date repayment is due. The creation date establishes when the obligation began, which matters for statute-of-limitations purposes later. Without a due date, the creditor can technically demand repayment at any time, but that ambiguity makes enforcement messier.
Add a plain acknowledgment of the debt. Something like “I, [Debtor’s Name], owe [Creditor’s Name] the sum of [amount] for [reason]” does the job. Naming the reason isn’t strictly required, but it heads off later arguments about what the money was for.
Spelling Out Repayment
You have two basic structures: a single lump-sum payment by a set date, or installments over time. For installments, spell out the amount of each payment and when each is due. “Monthly payments of $200 on the first of each month, beginning April 1, 2026” leaves nothing to interpret. Vague phrasing like “when I can” is practically unenforceable.
If partial payments are allowed, say how they’ll be applied: to interest first, then principal, or the reverse. If late payments trigger a fee, state the amount and when it kicks in.
Interest, Usury Caps, and the IRS
If you’re charging interest, state the percentage, whether it’s simple or compound, and how often it accrues. Without a written interest rate, the debt generally accrues none.
Every state caps how much interest a private lender can charge. These usury limits typically range from about 10% to 36% depending on the state. Going over the cap isn’t a technicality: consequences range from forfeiting all interest on the loan to having the entire agreement declared void, and in some states charging usurious interest is a criminal offense. Check your state’s maximum for personal loans before you set a rate.
An interest-free loan sounds generous, but it can create a tax problem for the lender. When you lend money at no interest or below the IRS’s Applicable Federal Rate, the IRS treats the missing interest as if you earned it anyway. This is called imputed interest. For March 2026, the short-term AFR is 3.59% annually.1Internal Revenue Service. Rev. Rul. 2026-6
There’s an important carveout: gift loans of $10,000 or less between individuals are exempt from imputed-interest rules, as long as the borrower doesn’t use the money to buy income-producing assets like stocks or rental property. For loans between $10,000 and $100,000, the imputed interest is limited to the borrower’s net investment income for the year.2Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates For small loans between friends, this rarely matters. For anything larger, set a rate at or above the AFR to stay clear of it.
Optional Protections Worth Adding
Collateral
For larger debts, the IOU can identify specific assets the borrower pledges as security: a vehicle, electronics, or other valuables. Describe the collateral clearly enough that it can’t be confused with something else, including serial numbers, makes, and models where they exist. State that the creditor can claim the collateral if the borrower defaults. Secured debts involving real property or vehicles may require separate legal filings to perfect the creditor’s interest, which is beyond what a simple IOU can accomplish.
Default and Acceleration
Define what counts as a default. One missed payment? Two consecutive missed payments? Failure to pay by the final due date? Say so. Then state the consequence. The most common provision is an acceleration clause, which makes the entire remaining balance due immediately on default. Without it, you’d have to sue for each missed payment separately.
Governing Law
If the borrower and lender live in different states, add a sentence naming which state’s laws govern the agreement. That single line settles which state’s usury caps, statutes of limitations, and contract rules apply if the deal ever ends up in court.
Signing the Document
Both parties should sign and date the IOU using the same names that appear in the body. The borrower’s signature is the critical one, because it proves they acknowledged the debt, but having the lender sign confirms both sides agreed to the same terms.
Witnesses and Notarization
Witnesses aren’t legally required for most IOUs, but they strengthen the document. If the borrower later claims they never signed or were pressured into signing, a witness can testify otherwise. Use at least one witness who isn’t related to either party, and have them sign and print their name.
Notarization is a step further. A notary public verifies each signer’s identity and confirms they signed voluntarily. Courts tend to give more weight to notarized documents because the notary’s seal makes it much harder to claim forgery or that the signer didn’t understand what they were agreeing to. The cost is usually modest, and for loans above a few thousand dollars it’s worth the trip.
Electronic Signatures
Under federal law, an electronic signature carries the same legal weight as a handwritten one. The E-SIGN Act provides that a contract cannot be denied enforceability solely because it was signed electronically.3Office of the Law Revision Counsel. 15 USC 7001 – General Rule of Validity If you’re signing over email or through a digital platform, both parties should keep the signed electronic version. For anything you might realistically need to enforce, a notarized paper original still gives you the strongest footing.
Keep Copies
Both parties should keep a signed copy, and the creditor should hold the original since that’s the primary evidence of the debt. If you’re using paper, scan or photocopy before handing over the original. The IOU is worthless as evidence if you can’t find it when you need it.
When You Should Use a Promissory Note Instead
A promissory note is the IOU’s more formal cousin. It includes an unconditional promise to repay on specific terms and follows a recognized structure under commercial law, so courts generally treat it as stronger evidence of a binding obligation. If the loan involves a large amount of money, a long repayment timeline, collateral, or interest, draft a promissory note rather than an IOU. A detailed IOU can still be enforceable, and the more specific it is, the closer it functions to a promissory note in practice.
How Long an IOU Stays Enforceable
You can’t wait forever to enforce an IOU. Every state sets a deadline for filing a lawsuit to collect a debt, and these limitations periods typically fall between three and six years for written agreements, though some states allow up to ten years or more.4Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt Thats Several Years Old? Once that window closes, you lose the ability to sue even if the borrower clearly owes you money.
In many states, a partial payment by the borrower restarts the clock, running the deadline from the date of the last payment rather than the original due date. That can help a creditor whose borrower is paying sporadically, and it can also mean a borrower who sends a small goodwill payment on an old debt has reopened a lawsuit window they thought had closed.
Mistakes That Undermine an IOU
The biggest mistake is keeping things vague. An IOU that says “John owes me some money” is barely better than nothing. The second is not getting a signature at all. Beyond those, a few pitfalls weaken or kill an otherwise good IOU:
- No due date, which makes proving default an uphill battle.
- An interest rate above the state usury cap, which can void the interest or the whole agreement.
- Only one copy in existence, so a loss or destruction of that copy leaves you with nothing.
- Oral modifications to payment terms or balance, which are hard to prove and easy to dispute; put every change in writing.
An IOU doesn’t need to be complicated, but it does need to be specific. Fifteen minutes of careful drafting when you write it saves months of trouble if the loan goes sideways.