Is an IOU legally enforceable?

Generally yes, but barely. An IOU is just an acknowledgment that one person owes another a specific amount. Without payment terms, interest, or a due date, courts can enforce it as a debt acknowledgment but cannot extract structure that was never agreed to. You will likely have to file as an open account or breach of an oral contract, which often triggers a shorter statute of limitations than a written promissory note.

When is an IOU enough?

Almost never for serious money. An IOU works for very small amounts ("you got dinner, I owe you $40") where the relationship and the size of the debt mean enforcement is theoretical. The moment the amount, term, or your trust level changes, upgrade to a promissory note. The cost is the same: 30 minutes of work.

What does a promissory note add over an IOU?

A promissory note is a written, signed promise to pay a specific sum on specific terms. It adds: a defined repayment schedule, interest rate, late fees, default definition, acceleration clause, and (if secured) collateral terms. It is legally classified as a "negotiable instrument" in many cases, which gives it stronger enforcement than an oral agreement. In court, a clear promissory note is among the cleanest contract cases there is.

When should I use a loan agreement instead of a promissory note?

Use a loan agreement when there are obligations beyond simple repayment. Examples: ongoing covenants (the borrower must maintain insurance, provide financial statements, not take on additional debt), draws and re-draws (a line of credit), warranties and representations, indemnification, and complex default provisions. Loan agreements are common for business loans, real estate financing, and any deal involving a bank. For most private loans between individuals, a promissory note is enough.

Can I have both a promissory note and a loan agreement?

Yes, often you should. Lenders typically use a loan agreement to spell out the broad relationship and a promissory note to capture the actual repayment promise. The note "evidences" the debt under the agreement. For private loans this is overkill; for business or commercial loans it is standard practice.

Does a promissory note need to be notarized?

Most states do not require notarization for a promissory note to be enforceable. Notarization is recommended though, because it adds a layer of evidence that the borrower actually signed the document (and that they were the person they claimed to be). Some states require notarization for secured notes that pledge real estate. When in doubt, notarize.

What is a "negotiable" promissory note?

A negotiable promissory note can be sold or assigned to a third party, who then has the right to collect from the borrower. Under UCC Article 3, a note is negotiable if it: contains an unconditional promise to pay, a fixed amount of money, payable on demand or at a defined time, payable to a specific person or to bearer, and signed by the maker. Most well-drafted notes meet this test by default. Negotiability matters most for commercial lenders; for family loans it rarely comes up unless you decide to assign the debt later.

How long can I wait before suing on each one?

It depends on the document and your state. Promissory notes (written contracts) typically have a longer statute of limitations than oral agreements or open accounts. Common ranges: 3 to 10 years for written promissory notes, 2 to 6 years for oral agreements, and 3 to 6 years for open accounts (which is sometimes how an IOU gets categorized). Use our Statute of Limitations Lookup tool to check your state.

Promissory Note vs IOU vs Loan Agreement

Three documents that get used interchangeably and shouldn't. Each one creates a different level of enforcement, and the gap between them is where most private-loan disputes go wrong.

The 30-second version

IOU - acknowledges that money is owed. Light, informal, weak in court.
Promissory note - a written, signed promise to pay specific terms. The right document for almost every private loan.
Loan agreement - a full contract that goes beyond the loan itself: covenants, warranties, ongoing obligations. Used for business and commercial loans.

IOU: the bare minimum

An IOU is exactly what the name suggests: "I owe you." It typically has the date, the amount, the names of both parties, and a signature. Sometimes a due date. That's it.

What it gives you: evidence that the borrower acknowledged a debt. Courts will generally enforce an IOU as a debt acknowledgment.

What it lacks: repayment schedule, interest rate, late fees, default terms, acceleration clause, collateral. Without these, the lender cannot enforce structure that was never agreed to. Many states will treat an IOU as evidence of an oral or open-account debt, which often comes with a shorter statute of limitations than a written promissory note.

When it is enough: very small amounts where you would write off the loss. "I covered your dinner, you owe me $40." Anything bigger, upgrade to a promissory note.

Promissory note: the right tool for most private loans

A promissory note is a written, signed promise by one party (the maker / borrower) to pay a defined sum to another (the payee / lender) on defined terms.

What it includes (at minimum):

Principal amount
Interest rate (must be at or above the IRS Applicable Federal Rate to avoid imputed-interest treatment, and at or below your state's usury cap)
Repayment schedule (monthly installments, balloon payment, demand, etc.)
Maturity date
Late fees and grace period
Default definition
Acceleration clause (full balance due on default)
Collateral terms (if secured)
Choice of law (which state's law governs)
Signatures

What it gives you: a clean contract case in court. The note is the contract; the payment ledger is the breach. Default judgments are common when the borrower does not show up. If the note is "negotiable" under UCC Article 3, you can also sell or assign the debt to a third party.

When to use it: almost every private loan. Family loans, friend loans, owner financing of a vehicle or boat, employee loans, anything where the relationship is two parties and the deal is "I lend, you repay."

Sub-types of promissory note

Installment - regular fixed payments over a set term. The most common structure.
Secured - backed by collateral. Best for larger loans where you want a real fallback.
Unsecured - no collateral. Faster to set up but riskier.
Demand - lender can call the full balance with proper notice. Useful when timing is open-ended.

Loan agreement: the full contract

A loan agreement is a broader contract that includes the loan itself plus a web of additional obligations.

Common contents beyond a basic note:

Representations and warranties (the borrower confirms specific facts about themselves and the loan)
Covenants (ongoing obligations: maintain insurance, provide financial statements, not take on additional debt, not sell certain assets)
Conditions precedent to funding (what the borrower has to do or provide before getting the money)
Draws and re-draws (for revolving lines of credit)
Indemnification
Detailed events of default (beyond just non-payment)
Cross-default and cross-collateralization clauses
Dispute resolution (arbitration, jurisdiction, venue)

What it gives you: control over a complex relationship. If the borrower's financial situation changes, the covenants kick in before non-payment happens.

When to use it: business loans, real estate financing, any bank-issued loan, any private loan where you want ongoing oversight (financial reporting, asset restrictions). Often paired with a promissory note that "evidences" the debt under the broader agreement.

Side-by-side

	IOU	Promissory Note	Loan Agreement
Names & amount	Yes	Yes	Yes
Repayment schedule	Sometimes	Yes	Yes
Interest rate	Rare	Yes	Yes
Late fees / default terms	No	Yes	Yes
Acceleration clause	No	Yes	Yes
Collateral terms	No	Optional	Yes
Covenants & warranties	No	No	Yes
Negotiable / assignable	No	Often yes	Sometimes
Best for	Tiny debts	Most private loans	Business / commercial

Which one should you use?

For 95% of private-party loans, the answer is a promissory note. It is fast to draft, legally robust, and provides the structure that prevents most disputes. Use an IOU only for trivial amounts. Use a loan agreement when you have ongoing obligations beyond simple repayment.

Installment Note Secured Note Unsecured Note Demand Note

What to check before signing any of them

Interest rate vs state usury cap. Use our Usury Limit Checker to make sure the rate is legal in your state.
Interest rate vs IRS AFR. Loans above $10,000 should charge at least the Applicable Federal Rate to avoid imputed-interest issues.
Statute of limitations. Use our Statute of Limitations Lookup so you know how long you have to enforce.
Notarization. Recommended for evidentiary strength even when not strictly required.
Both parties' ID. Match names on the note exactly to government ID.