Demand Loan

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.

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.

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 

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:

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

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. 

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

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

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.