Demand Loan

April 14, 2021

8 min read

As the name suggests, demand loan is the type of loan in which the lender can demand to be repaid at any time. This agreement is clear for both the borrower as well as the lender at the time of processing. Often, in-demand loans, lenders, or financiers can claim the lent money to be paid in comparatively shorter periods of time compared to other loans such as term loans. Because these loans are sanctioned without fixing on the duration of repayment, often, borrowers can enjoy the liberty of paying back the amount without dealing with prepayment costs.

What are Demand Loans Used for?

Many areas can benefit from the use of capital claimed from demand loans, some of which are stated below:

To take care of day-to-day working capital needs
Funding (short-term) for new businesses
Rent payments
Salary payments
For purchase of raw material
For purchase of vehicles
For purchase of livestock
For purchase of machinery and equipment
Temporary working capital
Investment loans
Partnership loans

Features of Demand Loans

Mentioned below are the features of these types of loans;

Demand loans are secured loans that the lenders grant against tangible assets owned and offered by the borrowers as collateral.
The tenure of the loan is negotiable and is decided by the lender.
The lender decides the term of the loan.
Demand loans are essentially approved to be able to meet short-term business requirements.
The tenure of this loan can not be lesser than seven days.
Components of the loan can be divided by banks over different maturity periods according to the requirement of the borrower.

Benefits of Demand Loans

Despite being an unconventional method such as availing a tenure loan, there are several advantages associated with demand loans, some of which are stated under here:

Demand loans are apt for gaining quick capital for running businesses and buying raw material, paying salaries, rents, etc.
The interest amount to be paid by the borrower is only calculated on the percentage of the said amount that is actually used.
The loan amount can be repaid to the lender by the borrower earlier than the decided tenure without inculcating any additional penalties for prepayments.
Borrowers can avail themselves of the loan without worrying about long-term EMI’s (Equated monthly installments).
Borrowers can make small payments as per their liquidity until the time they can pay back the entire amount.

Demand Loans vs. Term Loans

There is an ongoing debate about what type of loan is better for you between demand loans and term loans. Let us take a look at the pros and cons of both so that a better understanding can be achieved as to why demand loans are better for you, given your requirement.

Specifications	Demand Loans	Term Loans
Motive	Demand loans are ideally used for raising capital for short-term start-up businesses in which one can purchase materials, pay salaries, rent, etc.	Term loans are essentially used for starting new businesses as well as when looking to expand existing businesses.
Tenure	No lesser than 7 days, demand loan tenures are more suitable for shorter durations of tenure periods. These periods are negotiable as per agreement between the borrower and the financer.	Term loans are granted for longer and fixed tenure periods ranging from 1 year to as long as 20 years. The tenure period, in this case, is non-negotiable.
Flexibility on Interest	Interest is only charged on the borrowers’ actual amount and not on the entire loan amount.	Interest in term loans is charged on the whole amount.
Repayment Clause	Repayment can be made at any given time, as per the borrower’s convenience and the lender. No additional charges are levied.	In this case, interest is charged on the principal amount, and the tenure is at a fixed period which needs to be paid in installments as agreed upon at the commencement of the loan.
Security	These loans are approved by financiers and/or banks against collateral such as stock holdings, land buildings, etc.	These loans are sanctioned against collateral such as machinery, plants, buildings, etc.
Penalty Clause	The best part about demand loans is that there is no interest charge levied upon borrowers against prepayment or any change in tenure payments.	Penalties are charged to borrowers in case they wish to make a prepayment of the loan amount before the due date of the tenure.

Disadvantaged of Demand Loans

Now that we have had an in-depth understanding of demand loans and their pros let us look at some disadvantages.

The lender or financer can demand for the loan amount back at any time as per his/her convenience, which could lead to unsavory circumstances for the borrower.
The borrower could extend the loan tenure if he/she doesn’t have the amount at the time of the finalized tenure date, lengthening the bargain’s payment process.
Interest is only levied upon the amount used by the borrower and not the entire loan amount, which could reduce the chances of earning money for the financer in case a small amount is used.
Tangible assets work as collateral in case of a demand loan, so in case some loophole is overlooked by the lender, the borrower could abscond with the money, although this is highly unlikely.

To be able to gauge the pertinence of a demand loan, you must identify the type of business you want to run to avail such a facility. Demand loans are extremely flexible and beneficial, both to the borrower and the financier, making the process a lot easier. No penalties or additional interest and prepayment penalties make this type of loan a very lucrative opportunity for many. Swift and efficient, demand loans are the ones for you if you are looking at short-term capital with the least hassles and less paperwork. Go ahead and apply for your demand loan today and watch your business flourish without the added worry of finance.

Demand Loan FAQs:

1. Under what circumstances should one apply for a demand loan?

Someone who needs funding to run their business with flexibility of repayment as well as low interest rates should apply for a demand loan.

2. Does a demand loan mean that one has to make repayment as per the demand of the lender?

The repayment of a demand loan can be made as per the demand of the lender but this usually varies from lender to lender and terms are clarified in advance at the time of application process.

3. Can I make the repayment of my demand loan in installments?

No such facility of repaying in instalments is part of a demand loan process. The main payment of loan can be made in full as per the amount of funding taken.

4. Is overdraft and demand loan the same thing?

No. These are both different options. Overdraft is a financial feature that is provided to customers who keep a bank account with a specific bank or lender whereas in a demand loan no such bank account requirement is there.

5. Do you need to put collateral against a demand loan?

Demand loans are not collateral-free. The person seeking the loan needs to show their collateral and assets so that they can avail the loans based on them. Demand loans are also called secured loans.

6. How do you differentiate between term loans and demand loans?

In a term loan, the borrower gets a loan for a longer period of time while for shorter periods of time, people opt for demand loans.

7. In case I am ready to repay my demand loan before the stipulated time period, do I need to pay any extra charges?

No. The best part about demand loans is that you can repay the loan whenever convenient to you. No additional charges will be levied in such a scenario.

8. Do demand loans work for large scale businesses as well?

Yes. As long as the amount required by the borrower and the amount to paid by the lender is agreed upon, demand loans can be used for any scale of businesses.

9. What other names can demand loans go by?

Demand loans are also called secure loans as well as working capital loans.

10. In addition to collateral, what else can I use to avail a demand loan?

In addition to collateral, tangible assets such as vehicles, jewellery, cash, inventory, etc. can be used.