I bought a set of large letter stencils years ago and they have served me well. I just trace the letters I need with a pencil, spacing them close together to save on fabric. When you are tracing, make sure you pay attention to the direction of your fabric. I say this because when I got really busy tracing lots of names on lots of fabrics at once, I accidentally traced a letter upside down or sideways.
Lay your wonder under down on an ironing board, paper side down. Preheat your iron and turn off the steam.
I didn't use much of my 1/4 yd of fabric, so I cut close to my tracings so that I don't waste fabric or wonder under. Press with a hot iron.
Here is one traced letter, backed with wonder under. The back side of this is now paper.
Cut along your tracing lines, and lay out your letters where you want them on your towel.
Peel the paper backing off to reveal the iron-on adhesive.
Put the letters back exactly where you want them, and press with an iron (dry).
Now you use a little bottle called "Fray Check" and outline the edges of the letters with it and allow it to dry. This stuff reeks of fumes, but it will make your towel hold up for years of washing and drying without fraying!
The last thing you will need to do is zig-zag stitch your letters on, after the fray check is dry. Stitch it so that the outer stitch is right on the outside edge of the letter, on the towel. The inner stitch will be on the letter. These make great gifts when you make them with different themes to match the kids. I've made: Batman, soccer, football, Princesses, Ariel, Tinkerbell, ballet, baseball, Raiders, etc, etc. The options are endless! Enjoy!