​When should you use an IOU template?

A free IOU template serves as an informal loan contract. Still, having this type of document in writing benefits both the borrower and the lender. Sometimes, these forms are also known as “Debt Acknowledgment Forms” in cases where:

• You loan a certain amount of money to a person and you want your agreement in writing.
• You borrow a certain amount of money from a person and you want the terms of your agreement in writing.
• The loan includes relevant payment information like interests which you need to specify.
• You’ve transacted with the person in the past and you accept an IOU note.
• You don’t have enough money to pay for an item so you give the merchant an IOU form for the balance.
• You need to borrow a specific amount of money to make a down payment.

Download and use this free IOU template then affix your signature as a sign of good faith to the lender that you will pay back the money you borrowed. If not, the lender may have to compose a legal document to recover what you owe.

Downloadable Templates:

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What to include in an IOU template?

Most of the time, when people hear the term “IOU,” they think of a napkin or a piece of paper with a note scribbled on it. Because of this, IOU templates don’t have a very good reputation. Thus, people don’t take them too seriously. But in reality, an IOU note is a powerful document to use when you have an agreement with another party.

As long as a borrower and a lender perform a transaction, they can use the IOU to set the terms and conditions of repayment. This is especially important for when you want to have a written record of your transaction, not just a handshake. Although simple, you must include relevant information on the template:

• The basic information about the people involved in the transaction
  First of all, it’s important to include the full names, addresses, and contact details of the people involved namely the borrower and the lender.
• The payment information
  Indicate the loan amount along with other payment information such as the minimum payments, the due dates of payments, interest rates, and penalties for late payments. Also, include the acceptable payment methods like online payment, bank deposit, and cash.
  When it comes to the payment information, you can be as specific as you want. For instance, you can specify that the borrower must make monthly payments and inform the lender when he has already made those payments. You can even specify the payment amount along with the fees the borrower needs to pay when he makes late payments.
• The signatures of the people involved
  For the free IOU template to be legally binding, it must have the signatures of both the borrower and the lender. Make sure that you ask the other party to sign after you’ve finalized the document.
• Termination details if any
  This part includes any details about what happens when the borrower doesn’t pay the loan. For instance, the lender gains ownership of the collateral, the acceleration of the debt or collecting additional costs.
• Signature of a notary public
  This depends on the state you’re in because not all states require the signature of a notary public to make the IOU enforceable. Still, this is highly recommended, especially if the loan amount is large.

Do you need a formal IOU template?

Lenders who agree to accept an IOU template do so because they don’t want to place a strain on their relationship, especially in the case of friends, partners or family members loaning money. But when you think about it, if the borrower doesn’t pay back the loan because there’s no record of it, this will cause a lot of trouble too.

No matter how you look at it, creating an IOU form is in everyone’s best interest. The only situation where a lender won’t ask for such a document is when he’s completely willing to let the borrower get away without paying for the loan. This is why it’s important to have a formal IOU template.

The IOU protects the lender and it also forces the borrower to think about whether or not he will push through with the loan. If the lender creates the IOU and asks the borrower to sign it, the latter will think more carefully about whether he wants to risk ruining their relationship in case he can’t repay the loan.

IOUs are very simple and easy to make. You can even download this free IOU template and use it in case anyone decides to borrow money from you. If you’re loaning a substantial amount to someone, no matter how close you are to the person, this document is important.

What are the legal implications of an IOU template?

You create an IOU in cases where a one party lends money to another, and the lender wants the money back by the date they’ve agreed upon. You can also create this document when a merchant provides a product or service to a customer and the latter will give the payment at a later date. Let’s take a look at the legal implications of an IOU:

• If you have a legally-binding IOU, this can help you out in case you get audited by the IRS. Therefore, you must make sure that the IOU has the proper format and contains all of the relevant information.
• You must know the difference between a promissory note and an IOU. Often, it’s difficult to enforce an IOU in court, especially if you made it as an informal agreement. Conversely, promissory notes include more information such as the steps the borrower needs to take to pay back the loan. It also includes the consequences if the borrower isn’t able to follow these steps. This is why it’s recommended to have your IOU notarized so you can use it in court if necessary.
• If you have any doubts about the IOU template, consult with a lawyer. A lawyer can explain to you all of the legal details associated with IOUs, no matter how small they are. Also, a lawyer can offer suggestions about any legal actions you may take in case of an issue.

How does an IOU differ from a promissory note and a loan agreement?

When you see someone struggling financially, it can be very difficult to decline when he/she asks you for a loan. But when it comes to repayment, this is where issues arise. There are different types of documents you can create in such cases namely IOUs, promissory notes, and loan agreements:

• IOU
  This document includes basic information namely the loan amount, the due date of the loan, and the names and signatures of both borrower and lender. Use this if a close family member or friend asks for a loan or if you need an “informal” type of documentation.
  What makes an IOU different is that it’s the simplest and the least formal type of documentation. Also, only the borrower’s signature is important for this document.
• Promissory note
  This document includes more information including:
  the amount of the loan
  the loan’s due date
  the name of the lender
  the name and signature of the borrower
  details about the installment payments and installment dates
  details about collateral terms
  details about interest if any
  Use a promissory note if you think the borrower may need to pay you back little by little. Also, use this document if you want to charge interest or if you think you may need to ask for collateral.
  There are two types of promissory notes namely secured and unsecured. For the former, it involves collateral terms.
• Loan agreement
  Unlike the other two documents, this one includes the most information:
  the amount of the loan
  the loan’s due date
  the name of the lender
  the name and the signature of the borrower
  details about the installment payments and installment dates
  details about collateral terms
  details about interest if any
  the consequences in case the borrower doesn’t pay
  late fees or charges the borrower might incur
  prepayment discounts if any
  several and joint liability
  the right to transfer if needed

Use this document when you’ve loaned a huge amount. Also, use this document if you want to charge late fees to the borrower if he makes late payments. This will also be very useful if you want to include any defaulting consequences.

This is the most formal type among the three documents. It includes more information which makes it more enforceable in courts. Also, it includes the right to transfer which allows the lender to transfer the loan to another party if needed.

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