What makes promissory notes different than IOUs? A number of things, of course, but one of the most important things to understand is this: an IOU is simply an acknowledgement that a debt exists, while a promissory note includes a more specific promise to make a specific payment by a specific date. While a “promise” might not have a lot of meaning every time it’s used between children, this written promise or agreement in a contract can have a lot of weight when it comes to legal matters. That’s why the term “promissory note” has been interchanged with loan agreements and other contracts - and you’re about to learn why you should always have one written out when someone owes you money.

Though they might not sound like ironclad agreements, a promissory note can come in many ironclad forms, and typically they will have the full power of the law behind them. That’s why it’s so important to understand what a promissory note is, what kinds of contracts can be considered promissory notes, and what they typically consist of.

For example, a loan agreement can be considered a promissory note, because the person taking out the loan (the borrower) will promise to make specific payments at specific dates, acknowledging that the debt exists. When this is signed by both parties, it becomes the aforementioned promissory note and means that the lender of the money will have a certain amount of legal rights when it comes to making sure the money promised is actually delivered. This is often what happens in foreclosure cases, and the existence of the promissory note is exactly what makes these foreclosure cases with the backing of state and local governments possible. After all, both parties agreed to the promise of money in writing.

If you were to loan money to a friend, you should make sure that a promissory note is signed, because if things should go south and your friendship is jeopardized by the defaulting on the loan, at least you will still have the legal authority to ask for the money. Without a promissory note, you are essentially at the “behest of the borrower,” in so many words. They can choose to pay you back or not pay you back. Of course, not paying you back without a promissory notes would have some consequences, like potentially losing your friendship, but if you’ve lent out a lot of money, you’ll want that promissory note so you can legally try to get the money back.

Don’t ever loan out money without asking for a promissory note to be signed. It’s what they mean by saying you’ve put something “in writing,” and if you aren’t putting these types of things in writing, then you stand a high risk of losing a lot of money. Instead, fall back on promissory notes - though they might sound relatively innocuous, they can be very powerful legal tools that put the justice system on your side.