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Demand loan, often termed as Working Capital Demand Loan (WCDL) is basically being ready to repay the loan on demand of the lenders. In a demand loan, the financiers or lenders can ask for the lent money to be repaid by the borrower in a relatively shorter duration. Also, the borrowers have the liberty to repay the amount anytime without facing any pre-payment charges. Unlike term loan where loans are sanctioned on a fixed tenure and repayment on installment, a demand loan is a form of short-term finance with no fixed tenure.
Purposes of Demand Loan
There are several purposes to fulfil that an individual or business needs demand loan. The common purposes for opting for a demand loan are as follows:
- Short-term funding for start-up businesses
- To meet daily and temporary working capital requirements
- Used for raw material purchase
- Paying office space rent and salaries
- Purchasing small assets like cars, farm animals or equipment
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Features and Benefits of Demand Loan
There are some benefits demand loan offers that prove helpful to the borrowers to opt for this loan. The benefits of demand loan are as follows:
- Demand loans are basically secured loans granted by the lenders against collateral
- Borrowers need to pay the interest only on the used amount
- Borrowers don’t have to worry about long-term EMIs
- Borrowers have the flexibility to make a small payment until they are eligible to pay the whole amount
- The loan amount or tenure is fixed by the lenders in consultation with the borrower
- The loan tenor shall not be less than seven days
- Loan component can be split by the banks, with different maturity periods as per the needs and requirements of the borrowers
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Difference between Demand Loan and Term Loan
It helps the borrower to understand demand loans better in reference to well-known term loans. With the existing difference between these two loan options, it is easier to understand Demand loans and their necessity. Therefore, differences between demand loans and term loans are mentioned as follows:
| Parameters | Demand Loan | Term Loan |
| Purpose | Demand loans are basically sanctioned to meet the working capital financial need such as purchase of small equipment, raw materials or repaying short-term liabilities. | Term loans are basically granted for starting a new business or expansion of existing business, purchase of land/plant, machinery for setting up factory etc. |
| Tenure | Generally granted for a short term ranging from a minimum of 7 days to a few months. | Granted for mostly 1 year to 20 years. |
| Repayment | It has an open-ended repayment schedule. Borrowers can repay the borrowed amount anytime when they have a surplus amount. But they are subjected to repay the entire loan amount anytime on demand of the lender. | Term loans have specified repayment terms with fixed installment facilities. Interest is charged on the principal amount in this case. |
| Interest | In demand loan, interest is charged on the amount used by the borrowers instead of the total loan amount. | In the term loan, interest is charged on the whole amount sanctioned as a loan. |
| Security | Demand loans are sanctioned by banks or financial institutes against some kind of security as goods or stocks, shares, land building, or any other assets. | In the case of the term loan, mortgage of land, plant, and machinery, the building may be shown as the security to avail loan. |
| Penalty | In demand loan, there is no such penalty for pre-payment which is normal for other loans with a fixed lock-in period. | In term loan, the borrower has to pay a penalty amount in case of repayment of their borrowed money before maturity term. |
FAQs
Q: I have a confusion that is this Term loan and Demand loan the same? How can I differentiate between Demand loan and Term loan and what is the basic difference of these two loans?
Ans. No, these two loans which are Term loan and Demand loan are not similar. The basic difference between these two loans are that is that if the person is opting for a long period of time to require funds in the loan it is called Term loan. And if the person is choosing short period of time for their funds in loan is called Demand loan. So, the demand loan is for the shorter period of time whereas term loan is for the longer duration which may range from 1 year to 20 years.
Q: Is demand loan a collateral free loan?
Ans. No, the Demand loans are not collateral-free loans. The individual has to show their assets and collateral before availing for demand loans. Thus, the demand loans are secured loans or collateral loans.
Q: Are there any pre-payment charges needed for Demand loans?
Ans. No, there are no pre-payment charges in-demand loan.
Q: Can I repay my demand loan in instalments?
Ans. There is no such type of instalments facilities in the demand loan. The person can repay the loan amount at any time but when the bank orders the individual to repay that loan amount then the individual has to repay the whole loan amount as defined by the bank or NBFC.
Q: Why should one choose Demand Loan?
Ans: One should choose demand loan if he/she is need for any instalment free loan that has a flexible time to repay. Basically, for the businesses that want a financial assistance to grow their businesses with no worries of repayment, demand loan is a good option.
Q. What is the difference between overdraft and demand loan?
Ans. Overdraft is a credit facility wherein customers can borrow cash up to a set limit, agreed with the bank. Whereas demand loan is a type of short-term working capital loan in which the lender asks for instant repayment as per his/her requirement. In overdraft facilities, customers can withdraw cash as many times they want until the total sanctioned limit is reached. In case of demand loan, loan amount is disbursed in full to the borrower.
Q. Is cash credit a demand loan?
Ans. No, both these credit features are different in nature. Cash credit is borrowing done on behalf of hypothecation of stock. Demand loan is a type of unsecured business loan offered without asking for collateral.
Q. What is loan repayable on demand?
Ans. The repayment period of demand loan shall vary from lender to lender. However, being a short-term loan it is generally repaid in a maximum period of 12 months.
Q. Is overdraft a demand loan?
Ans. No, Overdraft is a financial feature that is offered to customers who maintain a bank account with the respective bank or lender. In case of demand loan there is no requirement of bank account.