Demand Loan Vs Term Loan

Demand Loans and Term Loans are two popular loans available in the market today. Both have varied features and benefits and can be chosen based on the customer’s requirements. But before that, it is essential to understand the differences between these two types of loans.

Feature Demand Loan Term Loan
Collateral Required May or may not be required depending on the loan
Repayment Term Shorter duration (days to months) Longer repayment term (months to years)
Repayment Flexibility Borrowers can repay before the term without penalty Repaying before the end of the repayment term can result in a penalty
Capital The loan amount is lower as compared to Term Loans The loan amount is higher as compared to Demand Loans
Purpose Short-term business requirements such as purchasing working capital, raw materials, paying staff/rent, etc. Large capital requirements such as the purchase of land, expensive equipment, buying office/business space, etc.

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Difference Between Demand Loans and Term Loans

Now that we have gone through some of the salient features and benefits of Demand loans and Term loans, let us take a look at their differences -

  • Demand loans are generally availed for short term business expenses and as such come with a lower amount of loan whereas term loans can be used for both short term and long term business expenses and the loan amount varies depending on the requirement
  • Demand loans offer shorter repayment terms whereas term loans have a repayment period that can vary from a few months to about 30 years
  • Borrowers are allowed to repay their loans even before the end of the repayment period without having to pay a fine. This is not the case with term loans wherein repayments are made through EMIs but closing the loan in advance can result in a penalty
  • Demand loans are secured loans, i.e., require collateral whereas term loans can be both secured and unsecured depending on the type of loan being availed

What is a Demand Loan

A demand loan, sometimes also called a Working Capital Demand Loan or WCDL is a type of loan wherein the repayment term is not fixed but is generally on the shorter side and is usually provided for short-term business necessities. The lender can demand payment even at a short notice but the borrower, if he/she wishes to, can also repay the same earlier than the due date without having to worry about penalties.

Features and Benefits of Demand Loans

Some of the salient features and benefits of demand loans are as follows:

  • These loans are usually provided for short-term business requirements such as the purchase of raw material, purchasing working capital, paying salary and office rent, purchase of relatively smaller assets such as equipment, cars, farm animals, etc.
  • Demand loans are secured loans, i.e., require collateral before sanction
  • The loan tenor is on the shorter side but above 7 days and is fixed by the lender in consultation with the borrower
  • The borrower will have to pay interest only on the percentage of the loan that is used but this can vary from lender to lender
  • One of the biggest advantages of demand loans is that repayment tenure is flexible and borrowers can pay earlier if they wish to without having to pay an additional fine. However, lenders can also demand repayment at any given time i.e., earlier than the decided date.

What is a Term Loan?

Term loans on the other hand are provided by financial institutions for both short-term and long-term and can have either fixed or floating rates of interest. The tenure generally ranges from a few months to about 30 years. The amount, in this case, is repaid through EMI or Equated Monthly Installments and is generally availed for business purposes. Term loans are generally best suited for long-term investments that are capital intensive. However, there are different types of term loans available for various purposes.

Features and Benefits of Term Loans

Given below are the salient features and benefits of term loans:

  • Term loans are generally procured for requirements that need a large capital such as the purchase of land, expensive equipment, new business, etc.
  • The repayment schedule is generally fixed and if the borrower wishes to repay the loan early, there will be pre-payment charges, or a penalty is levied
  • Term loans can be either secured or unsecured loans, i.e. collateral may or may not be required. Personal loans and business loans are examples of unsecured term loans whereas gold loans are an example of secured term loans
  • The rate of interest charged may be fixed or floating depending on the lending institution and the borrower’s requirements
  • There are different types of term loans available such as -
    • Short-term loans are a type of loan provided for a duration ranging between 12 months to 18 months. Certain lenders also consider loans of up to 60 - 84 months as short term loans
    • Intermediate-term loans are those that come with the repayment term of around 84 months are generally of a higher amount as compared to short term loans
    • Long-term loans come with a long repayment tenure of up to 30 years and have affordable EMI options in place for convenient repayment. These loans usually require collateral.

Conclusion

There are multiple loans in the market today and demand loans and term loans are two popular choices. As borrowers, you will have to avail of the loan that is most suited for your situation. Ensure that you check all the terms and conditions thoroughly before availing of a loan.

If you are looking for a personal loan (term loan) that is unsecured, disbursed within 24 hours, and comes with competitive interest rates, apply for a Money View loan today

Demand Loan vs Term Loan - Related FAQs

A demand loan is a secured loan which is also referred to as a Working Capital Demand Loan. It is generally taken by businesses to fulfill their working capital needs or by individuals to meet their urgent needs. Such a loan can be repaid anytime, and often doesn’t have a fixed tenure.

Demand loans do not have terms, and can be returned whenever the borrower wants without incurring any penalties. The lender, too, can ask for the amount back, and if the borrower is comfortable, they will return it at the same time.

Mostly demand loans are taken by businessmen to use as working capital. It is an understanding between the lender and the borrower that a demand loan can be required to be repaid in full at any given time.

A Working Capital Demand Loan or a WCDL is a loan taken by a business or an entrepreneur to be used as a working capital. Since it is a demand loan, it is understood that the money can be repaid in full by the borrower at any time.

A term loan can be either a fixed loan or a variable loan. Depending on the agreement drawn between the lender and the borrower, the rate of interest may remain same throughout the tenure, or vary according to the economy.

Yes, term loans can be publicly traded.

No, you cannot repay your demand loan in installments. You have the option to repay the loan anytime, but a demand loan needs to be repaid in full.

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