A demand loan is an informal type of loan that is to be repaid on the lenders’ call. There are no formal agreements and repayment schedules. Mainly, it’s is used among family members and relatives to fulfill needs of each other. However, banks do issue demand loans to good-standing customers.
There is higher flexibility, and these agreements are not legally enforceable most commonly. However, these agreements define the terms of the loan, like the interest rate (if agreed) and the principal amount.
Further, demand loans are flexible, and borrower enjoys greater flexibility as they do not have some specific date to pay back the funds. However, the lender can demand their funds back, and the lender has to pay it back.
From the borrower’s perspective, the demand loan is again flexible as they can opt to pay at any time without thinking about the need to pay the penalties, etc.
Also read, Mortgage loan
Features of demand loan
Following are some of the features.
- These loans may be secured/unsecured depending on the agreement between the borrowers and lenders.
- Usually, these loans are not legally enforceable. However, if it is raised via a bank, it’s enforceable.
- The borrower is not provided with the repayment schedule.
- The borrower can decide to repay the loan, and lenders can decide to recall the loan at any time.
- The interest is payable on the loan utilized or the period of usage.
Demand loan example
Overdraft arrangement is the best example of a demand loan. The borrower can repay the loan at any time without thinking about the penalty. Similarly, the lender does not provide a specific repayment schedule under the refinancing scheme.
Similarly, the funds obtained from an uncle can be an example of a demand loan as the uncle is not expected to provide you with the repayments schedule. However, he may recall its funds in an hour of need.
Purpose of demand loan
The purposes of demand loan include but are not limited to the following,
- Fulfill the short-term needs of the business.
- To fulfill the needs of the working capital loan.
- Purchase of small business-related equipment and assets.
- Any other temporary needs of the business-related expenses.
- To finance some specific job.
Working capital demand loan
Sometimes, the businesses may need funds to manage working capital. For instance, some external conditions might trigger difficulty in cash collection. Hence, the business may find it challenging to meet its working capital commitment. So, they may have to raise they finance via this financing arrangement.
On the other hand, the businesses may plan to finance their working capital needs with such arrangements.
Difference between demand loan and overdraft
Overdraft is an example of a demand loan as there is no associated penalty to repay the funds at any time. Further, there is no fixed repayment schedule to repay the liabilities.
Following are the conclusive remarks for the concept.
- There is no fixed repayment schedule.
- The borrower can repay the loan at their will.
- There is no penalty for the timing of repayment.
- The loan may be with/without collateral.
- Banks also issue demand loans.
- Overdraft/running finance arrangement is an example.