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An IOU or promissory note is an informal way of acknowledging a small debt between friends, family or co-workers, but it is not legally binding and can be difficult to enforce in court. It is best to limit the amount of any loan secured in this way and use a more formal promissory note for larger amounts. Casinos also use a special promissory note called a bookmark to guarantee reimbursement from losing bettors.
Many financial transactions are so routine and informal that a legal contract would seem excessive. Instead, many people prefer to use a less complicated method called an IOU. A promissory note, which can be written or verbal, is an informal acknowledgment of a small debt, usually between friends, co-workers, or family members. An employee who borrows change from a petty cash fund, for example, may write a promissory note to account for the money.
The name comes from the literal phonetic spelling of “I owe you.” When writing a formal note acknowledging a debt, the debtor often found it much easier to abbreviate “I owe you…” to promissory note. Although the origin of the abbreviation is English, other countries also recognize the meaning behind the term.
A promissory note is not the same as a formal promissory note or other financial contract. There are rarely witnesses to the writing of a promissory note, and repayment obligations may or may not be directly specified. Enforcing an informal agreement like this in court can be difficult, as the document may not be notarized or even recognized by the debtor. It is considered an acknowledgment of a debt, but the total amount may be so insignificant that legal collection actions would be counterproductive.
Because a promissory note is not always legally binding and payment terms may not exist, lenders and borrowers should consider limiting the amount of any loan secured in this way. Anything above a friend or family member’s comfort zone should be secured with a more formal promissory note, not an informal or verbal agreement. A promissory note is primarily used as a financial placeholder for small debts or nominal payments.
In certain gambling circles, a losing bettor may request a special promissory note called a bookmark to guarantee reimbursement to the casino. Periodically, the casino or other lender may decide to cash out on this marker, especially if the player wins a large sum of money elsewhere. Casinos and other gaming outlets usually have a significant number of IOU markers from regular players.
In short, if a person is unsure whether a transaction is a loan or a gift, it may be best to ask if an informal promissory note is necessary. The lender may not even bother to collect the debt, but at least both parties have acknowledged it and have some written record of the transaction.
Smart Asset.
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