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Demand Loan - Objectives, Features, Benefits, Interest Rates & Eligibility Criteria
A demand loan is a short-term credit facility that needs to be repaid in full whenever the lender demands.. It provides flexible repayment options and suits borrowers requiring immediate liquidity.
A demand loan is a short-term financing option where the lender has the right to demand repayment at any time. Unlike traditional loans, it does not follow a fixed repayment schedule, making it suitable for meeting immediate or seasonal business requirements.
Lenders typically extend these loans to borrowers who have a stable income and a strong credit history. The loan offers flexibility in both usage and repayment.
Below are its key purposes:
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
Demand loans are secured short-term loans that can be secured by pledging an asset as collateral
These loans have a short repayment tenure that ranges between seven days and one year
The demand loan interest rate is charged only on the sanction you utilise
As these loans do not have a predetermined tenure, you can repay the loan in smaller instalments until you have the money to pay in full
A demand loan is registered with a promissory note mentioning the loan amount and the demand loan interest rate
The table below explains this clearly in a simple manner.
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. |
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 secure 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 secure 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 secure a demand loan to meet this financial requirement. When the cash shortage is filled, ABC can repay the loan.
You can secure 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. The demand loan interest rate is applicable only to 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.
To be eligible to secure 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 with a decent credit score
You can explore other effective options apart from demand loans for quick and easy business funding. These alternatives help meet your working capital requirements with minimal complications.
Lenders on Bajaj Markets offer business loans to support your working capital needs with the following benefits:
Loan amounts of up to ₹80 Lakhs
Flexible repayment tenures of up to 96 months
Quick approval with minimal documentation
A demand loan is a short-term loan that the borrower needs to repay whenever the lender demands repayment. It generally requires collateral and is commonly used to address urgent or temporary financial needs.
A Working Capital Demand Loan (WCDL) is a type of loan that helps businesses cover their daily operational costs and short-term financial needs. Unlike fixed-term loans that follow a set repayment schedule, a WCDL gives the lender the right to request repayment at any time.
This form of financing plays an important role in maintaining steady cash flow and managing immediate working capital requirements for businesses.
An overdraft is a facility linked to a current or savings account. It allows the account holder to withdraw more than the available balance up to a predefined limit. A demand loan is a separate arrangement that does not require a bank account with the lender.
The borrower has to repay it in full when the lender demands it.
Whenever the bank demands it, you will need to repay the demand loan in its entirety.
Demand loans are applicable to businesses of any size, including large-scale enterprises. As long as both parties agree on the loan amount and terms, this form of short-term credit can support various business funding needs.
No, the banks do not charge any prepayment charges on demand loans.
Any individual or business can secure a demand loan. However, banks provide this credit facility only to their trustworthy customers.
No, a demand loan is a short-term credit with a repayment term extending from 7 days to one year.
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