Do you really understand IOU? The pitfalls behind debt certificates.

In simple terms, an IOU is a “promissory note”—one party promises to owe something to another party. It sounds simple, but many people have fallen into pitfalls.

What is the difference between IOU and formal bonds?

Many people confuse IOUs with bonds issued by banks, but there is a huge difference. Bonds and promissory notes are legally recognized financial instruments with enforceability. However, an IOU is different—it is just an informal record document. No matter how clearly it is written on paper, the law may not necessarily back you up. In other words, even if the other party signs it, you have no legal way to force them to repay the money.

How to Use IOU? Overview of Real-World Scenarios

Borrowing money between individuals If a family member lends you some money, in order to avoid disputes in the future, both parties can simply write an IOU. The format is very casual—any piece of paper, a note, or even a verbal agreement counts. But in this case, if the other party defaults, you basically have no recourse.

Inter-company transactions When there is a debt relationship between two companies, they sometimes use an IOU to informally confirm it. For example, if Company A owes Company B a fee, they might not go through formal contract procedures but rather sign a simple debt record.

Employees and Company When employees advance expenses to the company, or when the company owes bonuses to employees, some companies use IOU as a temporary receipt.

Core Issue of IOU: No Guarantee

This is the key point. IOU seems simple, but in reality, it carries significant risks. Because it is not recognized by law as a valid financial instrument, it is difficult to pursue legal remedies in case of disputes. It usually does not specify in detail:

• What are the consequences of default?
• When must the money be repaid?
• How is interest calculated?
• What will happen if it is not repaid?

In summary, IOU is more like a “good faith agreement” rather than a “legal obligation.”

If you want to use IOU, keep these points in mind

If you must use an IOU to record a debt, at least make sure to specify: both parties' names, the exact amount owed, and the date of signing. But to be honest, for large or important debts, it's safer to use formal channels (like having a lawyer draft a contract or using bank transfers).

Trust is important, but paper agreements are more important.