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A demand loan is fundamentally different from other types of loans on this count. Unlike other loans, you are required to repay a demand loan in full when the lender demands it. While other loans come with a predetermined repayment tenure, wherein you need to pay the loan amount and interest in full within a specific duration, the demand loan is different.

What is a Demand Loan?

A demand loan is a secured loan facility where you need to repay the loan amount and interest in its entirety whenever the lender demands. The provisions of this loan are known to the lender and borrower from the outset. 

The tenure of such loans ranges between seven days to one year. You can use these loans to cover your short-term expenses. Moreover, since these loans are secured, you may have to pledge collateral, which could be a residential or commercial property. 

This lending facility is also called the working capital demand loan because companies generally avail it to meet their short-term financial requirements. In addition, note that banks provide demand loan facilities to only their trustworthy customers.

Objectives of a Demand Loan

While the demand loan does serve the purpose of granting access to funds, it does cater to different needs. As such, the objectives of a demand loan vary for borrower and lender. Here are a few pointers that offer insight on this. 

  • Serves as a smart short-term solution for businesses 

  • Streamlines access to funds 

  • Allows lenders to offer customised services to trusted borrowers

  • Simplifies loan management for trusted borrowers 

Features & Benefits of a Demand Loan

When you decide to apply for a demand loan, you stand to enjoy the following features and benefits: 

Secured Loans

Demand loans are secured short-term loans that can be availed by pledging an asset as collateral

Short-term Loans

These loans have a short repayment tenure that ranges between seven days and one year

Interest Charged on Used Amount

The demand loan interest rate is charged only on the sanction you utilise

Flexible Repayment

As these loans do not have a predetermined tenure, you can repay the loan in smaller instalments until you have the money to pay it in full

Registered with Promissory Note

A demand loan is registered with a promissory note mentioning the loan amount and the demand loan interest rate

Difference Between a Demand Loan & Term Business Loan

To understand how demand loans function, you need to know the difference between demand loans and term loans. This way, you can draw parallels with a popular lending facility like term loans to better understand its functioning and necessities.

The following table presents the difference between term loans and demand loans:

Term Loans and Demand Loans: Differences 

Parameter

Demand Loan

Term Loan

Objective

Individuals and businesses can opt for demand loans to meet their short-term financial needs. 

Individuals and businesses can use the loan amount for various purposes, such as initiating or expanding a business, purchasing a plot, etc.

Tenure

7 days to 1 year

1 year to 10 years

Loan Repayment 

Although borrowers and lenders agree upon a fixed tenure, the final authority to close the loan remains with the lender.

It has a predetermined repayment tenure in which you have to repay the loan in its entirety. 

Interest Rate

Banks charge demand loan interest rates only on the loan amount that you use. 

You are required to pay interest on the entire loan amount sanctioned by the bank.

Collateral

These loans are secured in nature and require borrowers to pledge collateral in the form of an asset. 

Term loans may be secured or unsecured forms of credit.

Prepayment

There are no penalty charges if you pay demand loans before the end of the repayment schedule.

Banks charge a penalty fee for making a prepayment of a term loan. However, some lenders may provide a waiver on this fee. 

What are Demand Loans Used for?

Individuals and businesses can avail a demand loan for different purposes. Some of these typical reasons how you can use the demand loan amount are given below:

  • To use as short-term initial funding for a start-up

  • To cover daily working capital financial requirements

  • To cover other short-term requirements like purchasing raw materials and machinery or paying employees

  • Individuals can use it to meet their short-term financial needs, such as purchasing a car or a plot

Examples of a Demand Loan

Let us now understand the concept with three demand loan examples:

Example 1

Consider a small farmer named X who wants to open a dairy plant in his village. For this, X needs initial funding as a loan, but he has no credit history to present to the bank. In such a scenario, X can pledge an asset to avail a demand loan. 

The bank will also be willing to provide the loan as they can request repayment from X at any time. 

Example 2

Suppose an individual named Y needs to pay some urgent medical bills; he can avail a demand loan by pledging shares that he holds. As soon as Y gets access to funds, he can repay the loan amount. Y will only have to pay interest on the funds that Y uses.

Example 3

Assume a company named ‘ABC’ needs funds to meet its working capital needs or needs funds to purchase machinery. The company can avail a demand loan to meet this financial requirement. When the cash shortage is filled, ABC can repay the loan.

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Interest Rates for a Demand Loan

You can avail this lending facility by pledging an asset as collateral. Although you do not have to adhere to a fixed repayment tenure, you need to pay interest as per the agreement. 

Note that the demand loan interest rate is applicable only on the loan amount that you use. Lenders may charge a floating rate of interest, which may be higher than the prime lending rate of the financial institution. 

Eligibility Criteria for a Demand Loan

To be eligible to avail a demand loan, an individual or company must fulfil the following criteria:

  • The individual must be a citizen of India

  • A business must be registered under the Companies Act of India

  • The individual must be at least 18 years old

When Should You Use a Demand Loan?

Demand loans can be availed by everyone, be it an individual or a firm. However, banks provide this lending facility only to customers that they trust. So, it would be rather difficult to apply if you are a new customer of the bank.

A demand loan is best suited for the following categories of individuals or organisations:

  • Land and Homeowners

  • Proprietors of businesses

  • Shareholders

  • Entrepreneurs

  • Start-up financiers

Conclusion

In conclusion, a demand loan is the best lending option if your bank considers you a loyal customer. These loans only require you to pay demand loan interest rates on the amount you use, allowing you to save more.

However, whenever applying for a demand loan, bear in mind that these loans do not have fixed tenure. Instead, you will have to repay the loan in its entirety whenever the lender demands it.

Disclaimer

Reference of all T&C necessarily refers to the terms of the Partners as regards to pre-approved offers and loan processing time amongst other conditions.

FAQs for Demand Loan

What is the difference between an overdraft and a demand loan?

While an overdraft is a credit limit-based facility, a demand loan is a loan that you need to repay whenever the lender demands it.

What is a loan repayable on demand?

Whenever the bank demands it, you will need to repay the demand loan in its entirety.

Do demand loans also apply to large-scale businesses?

Yes, a business of any size can avail a demand loan.

Are there any prepayment charges needed for demand loans?

No, the banks do not charge any prepayment charges on demand loans.

Who takes demand loans?

Any individual or business can avail a demand loan. However, banks provide this credit facility only to their trustworthy customers.

Is a demand loan a long-term loan?

No, a demand loan is a short-term credit with a repayment term extending from 7 days to one year. 

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