A demand loan is a type of short-term loan, with a term of 180 days or less. These loans are not typical because there is no fixed date for the loan repayment. Another feature of demand loans is the floating interest rate that varies depending on the prime rate. The lending institution or person can require the loan repayment at any time. These loans can be secured and unsecured.
This type of loan may sound sinister in that the borrower must pay the money on the demand of the lender. Unlike standard loans, which have a set maturity date and are paid in installments, demand loans are repaid when the lender wishes so.
Demand loans are usually extended on a more personal basis, for example, between business partners who know each other for a long time. The idea behind them is that the lender should be assured the loan will be repaid within a reasonable timeframe. For this reason, specifics such as the term of the loan, are not discussed. If problems occur, the lender has the right to demand the loan repayment immediately.
Demand loans actually come with benefits for the borrower. They are common when it comes to business projects where it takes some time to get it all up and running. Borrowers do not worry about loan terms and installments, especially if they have agreed to repay the loan once the project starts making profits. Borrowers make small payments from time to time, but repayment usually takes place when the venture turns profits.
A demand loan is also a good choice of lenders who want to minimize potential losses. Suspecting that the borrower will undertake projects that will result in losses is only one reason to demand repayment. Economic and other changes may make the lender request repayment before a downward spiral prevents this from happening. Likewise, if the lender finds out that the borrower has defaulted on his other loans, he can demand repayment. The borrower can otherwise file bankruptcy as a way to avoid the loan repayment. Timely repayment works to the benefit of the borrower. If they repay the loan in a short period, they can secure another loan with the same lender.
It is usually businesses that benefit from demand loans, be it for a new venture or business expansion. As an added advantage, businesses can have two or more loans at a time. This is provided that the borrower has an outstanding payback history. These loans are also easier to qualify for compared to standard loans. Moreover, when the borrower has to pay off early, i.e. the lender demands this, no prepayment penalty applies.
Note that when the money is advanced to a broker, this will be called a call loan. With call loans, there are securities that serve as collateral. A call loan may be cancelled by the lender at any time as well. Thus, lenders can demand repayment at their discretion. The term call loan is used by some as a synonym for a broker overnight loan and broker loan.
Finally, given the many benefits of demand loans, how do you apply for one? You will have to sign a loan agreement, which determines the rights and duties of the lender and the borrower under the demand loan agreement. The loan terms specify the terms of repayment, the method of payment, for example check, as well as what constitutes default. Additional terms may specify penalties for late payment, indemnification of attorney’s fees, etc.