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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