Demand Loan

Financial Dictionary -> Loans -> Demand Loan

A demand loan is a rare form of loan that can be called for complete repayment without any prior warning to the borrower. In other words when the lender demands the money, the borrower must pay it. So unlike a regular loan that is paid in installments and has a defined maturity date, demand loans work on the specific demand of the lender.

Demand Loans sound sinister, but are usually created on a more personal basis, between a pair of longtime business partners. The idea is that the lender is sure the borrower will pay back the loan within a reasonable period of time, so no specifics are discussed. Should something go sour, the lender can demand payment right away.

Demand loans are common with new business ventures where it may take time to get the idea up and running. The borrower does not have to worry about installments and loan terms because they have agreed to pay it back once the venture is turning a profit. The borrower may make a small payment every now and then as a gesture, but will usually pay it back when profits allow.

For a lender a demand loan can be quite secure and lucrative. The longer the borrower takes to pay it back, the more interest is earned. However the lender doesn't have to wait until a maturity date, and if they fall on hard times they can call the loan, or if they suspect the borrower will fall on hard times or is deliberately avoiding paying the loan they can demand repayment.

This is a great security measure to ensure repayment. For example if the lender senses or sees the borrower going down a bad financial path, they can call the loan before it defaults. If there is a default with a regular loan the lender may only get a portion of the money back. Think of it as a preemptive strike.