subject: Issuing an IOU Note Helps Prevent Misunderstandings about Loan Obligations [print this page] Issuing an IOU Note Helps Prevent Misunderstandings about Loan Obligations
An IOU note is a contract that records the promise to repay borrowed funds. This type of agreement is often used amongst friends and relatives to ensure borrowers understand advanced funds are a loan and not a monetary gift.
Financial institutions issue an IOU note for most types of loans. When banks, credit unions, credit card companies, or mortgage financiers enter into loans they record the promise to pay using a document known as a promissory note.
Regardless of the name, these notes should document the borrowed amount, interest rate, payment amount and dates, and maturity date. When loans exceed $1000 it is appropriate to include a default clause outlining consequences if default occurs.
While family and friends often feel uncomfortable issuing IOU notes it is better to place financial agreements in writing to avoid future conflict. Many relationships have been disrupted or ruined because a loved one did not repay their debt.
In order for promissory notes to be legally binding they must be signed by the funding source and borrower. Dependent on the type of loan involved, notes might need to be notarized and include signatures from witnesses who verify they were present when all parties signed the document.
Preformatted promissory notes can be purchased at office supply stores or downloaded via the Internet. Many word processing programs include IOU note templates. Funding sources simply fill in the blanks and print the form for signatures.
When lending large sums of money it is best to hire a lawyer to draft loan contracts and promissory notes. When personal loans exceed $1000, funding sources may want to secure the loan with some type of collateral with value equal to or greater than the amount of loaned funds.
Collateral can include nearly anything of value. When banks issues promissory notes to secure real estate loans the property being purchased is used as collateral. The same holds true for automobile loans. Personal loans can be secured with property titles, artwork, jewelry, antiques, and other types of personal property owned by the borrower.
It is best to obtain legal counsel when lending funds for business startups and real estate investments. The IRS requires personal loans that exceed $13,000 to be secured with a notarized IOU note to confirm the loan is not a gift. Otherwise, the IRS can require borrowers to pay a gift tax.
Funding sources are allowed to charge allowable interest rates against borrowed funds. Private lenders are required by law to adhere to interest rates according to state usury laws. Funding sources that assess higher interest rates than allowed by law can face legal consequences. A trusted source for determining state usury law limitations is UsuryLaw.com.
Individuals engaged in personal loans exceeding $5000 may find establishing an account through Virgin Money to be beneficial. Virgin Money is a social lending program founded by Sir Richard Branson. This service provides various loan packages to create contracts, IOU notes, interest rates, and record loan payments.
While there is no law that requires funding sources to secure loans with an IOU note doing so can prevent misunderstandings and protect lenders if loan default occurs. This document is essential in providing evidence to the court and can help lenders obtain court ordered judgments if borrowers fail to comply with payment terms.
