written by khatabook | November 25, 2022

Features of Demand Loans, Repayment and Benefits

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Table of Content


A loan is an amount of money borrowed for an intended purpose with a promise to be returned at a stipulated time period at the given rate of interest. The lender at most times would require proper documents and maybe some collateral to be able to get loans from any financial institutions or banks. There are many types of loans, in this blog ahead we will figure out one important type of loan which is Demand Loan

Did you know? The tenure of demand loans can start from seven days and last up to one year. 

What is a Demand Loan?

Demand loans, as their name suggests, are the kind of loans where the lender has the right to request repayment at any time. It is a form of short-term finance provided by any bank to its customers. At the time of processing, this agreement is clear to both the lender and the borrower. When opposed to other loans, including term loans, in demand loans, lenders, or financiers frequently state that the borrowed money would be repaid in significantly shorter amounts of time. Because the length of repayment for these loans is not specified, borrowers frequently have the freedom to repay the loan amount early without incurring additional fees. Demand loan is also known as Working Capital Demand Loan, and it doesn't have any fixed tenure of fixed installment. 

Demand loans are an informal loan type that must be paid back at the lenders' request. There are no written contracts or repayment schedules. It is primarily used by family members and relatives to meet one another's needs. Banks do, however, grant demand loans to loyal customers. 

Also Read: How to Get Business Loans in Chennai - Eligibility & Application

What are the Characteristic Features of Demand Loans?

The characteristics of these loans are listed below.

  • Demand loans are secured against collateral which may be tangible assets owned by the borrower.
  • The term of the loan is customizable and up to the lender to choose.
  • The duration of the loan is set by the lender.
  • Demand loans are generally approved in order to satisfy pressing company needs.
  • The term of this loan cannot be shorter than seven days.
  • Depending on the borrower's needs, banks can distribute the loan components over different maturity periods.
  • Borrowers need to pay the interest only on the used amount

A written demand loan agreement, which is not usually legally enforceable but functions as a sort of moral contract between the parties, contains the broad terms of a demand note. These terms are significant because they specify the principal amount to be repaid, the interest rate, and the amount of time the lender must give the borrower until the note is due. Online, there are several free demand loan agreement forms to choose from.

What are Demand Loans used for?

An individual or organisation may require a demand loan for various reasons. The following are some typical reasons for obtaining a demand loan:

  • Short-term funding for start-up businesses 
  • To meet daily and temporary working capital requirements 
  • May be used for purchasing raw material 
  • Paying office space rent, wages and salaries 
  • To purchase small assets like cars, tools, machinery, farm animals or equipment

Example of Demand Loan

The arrangement of Overdraft is the best example of a demand loan. The borrower can repay the loan at any time without any worry about the penalty. Similarly, there is no specific repayment schedule provided by the lender under the refinancing scheme.

Also Read: How to Get Business Loans in Mumbai? Types & Documentation

Who May Benefit from a Demand Loan?

Demand loans are not for everyone, as you might expect. In fact, if you're a relatively new credit user, they may be rather challenging to get approved for. In general, banks and other prime lenders will only take into account borrowers who have been doing so responsibly for a number of years and who are genuinely capable of handling their debt.

Some examples of who can benefit from demand loan are as follows:

  • Homeowners
  • Landowners
  • Proprietors of small businesses
  • Entrepreneurs
  • Shareholders
  • Financiers for startups 

Working Capital Demand Loan: What Is It?

Maintaining an optimum capital for running a business is essential. To accommodate recurring demands for operating cash, banks and other financial organisations offer the Working Capital Demand Loan. It can be used to manage daily business spending or buy raw materials depending on your company's needs.

Why are demand loans a more lucrative option?

Due to the collateral security, banks typically feel secure disbursing this kind of loan. If they fall behind on their payments, they can recoup their debt by cashing in the value of the collateral. They also gain from a steady flow of money from the interest earned.  Demand Loan is hence a desirable source of income as well as a key tool for raising the value of their assets. 

Furthermore, since there is no prepayment penalty, it is the most practical type of loan for enterprises. The ability to close the loans earlier or make partial payments at any moment is provided to the borrowers. If they pay off the loan early, they just have to pay interest for the time they borrowed. The borrowers in this case save the interest for the remaining time.

When is Repayment of the Demand Loan Required?

As long as the loan amount is completely supported by the security, banks usually do not seek repayment of a demand loan. The value of the security supplied minus the margin would be regularly checked by the bank to make sure it was greater than the amount still owed. The bank may, however, ask the borrower to liquidate the loan in some circumstances when the given security is about to mature, or the security value is insufficient to repay the loan amount (with narrow margin). If the borrower is unable to pay off the loan, the bank will cash in the available security and apply the proceeds to the full amount owed on the loan. In such instances, any remaining funds will be used to the loan's closing costs.

Also Read: Brief Guide on Good Credit Score for Loan Applications

When Should You Use a Demand Loan?

Let's talk about the most ideal time to apply now that you are aware of the typical uses for demand loans. Keep in mind that demand loans may be very risky for both you and your lender. After all, if you default on your payments, your lender may choose to recall your loan at any time, which could cause financial hardship for both of you. In light of this, it is advisable to apply when you have sound financial standing, a clean credit history, and a solid relationship with your bank, credit union, or other lending institution. Consider the fact that demand loans are frequently utilised to support short-term objectives as well.

As a result, you should only obtain a demand loan if you intend to use the money for an endeavour that your lender deems beneficial and if you have the resources necessary to pay back the loan in full whenever it is due. The key is to do it when you're financially solid, looking for a flexible payment alternative, and are well aware of all the potential risks involved, whether you're seeking to fund a small business or invest in something else that's essential to you.

Conclusion

Demand loans are short-term loans provided by lenders to borrowers against collateral such as tangible assets. The features of these loans are that there is no set timetable for repayment of these loans. The loan can be repaid at the borrower's discretion. The time of repayment is not subject to any penalties. One can get a loan with or without collateral. Moreover, banks provide demand loans. It is easier to get a demand loan if one has a high credit rating. These loans are basically used to fulfil stop gap requirements for business as well as home needs.

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FAQs

Q: Do demand loans also apply to large-scale businesses?

Ans:

Yes. Demand loans can be used for any size of business as long as the amount needed by the borrower and the amount to be paid by the lender are agreed upon.

Q: Does having a demand loan mean having to pay back the money in accordance with the lender's demands?

Ans:

Demand loans can be repaid in accordance with the lender's requirements; however, this normally differs from lender to lender and the terms are explained in advance during the application process.

Q: What makes Demand Loan the best option?

Ans:

 If a borrower needs an installment-free loan with a flexible repayment schedule, they should opt for a demand loan. In general, demand loans are an excellent option for firms that seek financial support to expand without worrying about repayment.

Q: Are there any prepayment charges needed for Demand loans?

Ans:

No, there are no pre-payment charges for the in-demand loan.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.