This article explores the difference between demand loan and term loan. Demand Loan is a short-term secured loan that the borrower must pay back whenever the lender demands it. They have a short duration, are sanctioned quickly and do not entail a prepayment penalty. A term loan is a long-term loan with a fixed tenure and repayment period. The tenure can range from 1 – 20 years, entail more sanction time and involve a prepayment penalty.
Nowadays, two of the most popular types of loans available for individuals are demand loans and term loans. Even though they are similar in numerous aspects, there is a fair share of differences between them. This article will cover both types of loans in detail and highlight some of the most prominent differences between them:
Differences Between Demand Loans and Term Loans
| Parameter | Demand Loans | Term Loans |
|---|---|---|
| Definition | A demand Loan is a short-term loan that the borrower must pay back whenever the lender demands it. | A term loan is a long-term loan with a fixed tenure and repayment period. |
| Duration | Demand loans generally have a duration of 7 days to a few months. | Term loans’ duration period can be anywhere between 1 year and 20 years. |
| Disbursement Time | Since they are short-term loans, demand loans are sanctioned quickly. | Term loans are deemed long-term loans; thus, their sanction takes more time. |
| Payment Restrictions | Demand loans do not involve any sort of restrictions when it comes to payments. | Depending on the lender, term loans may have certain restrictions on payments. |
| Repayment Mode | Lenders of demand loans reserve the authority to ask for the DL’s repayment, or the borrowing party repay at their discretion. | Term loans feature a predefined payment method in EMIs (Equated Monthly Installments). |
| Pre Payment Charges | Borrowers are not required to pay a penalty or pre-payment charge to foreclose a demand loan. | Borrowers must pay a predetermined penalty if they want to foreclose a term loan. |
| Collateral | Borrowers need to pledge assets as collateral to acquire a demand loan. | Borrowers do not need to pledge assets as collateral to acquire a term loan. |
Even though both demand loans and term loans are variants of financing methods, they are numerous differences between them. Here is a detailed look at the differences between both types of loans based on different factors:
Purpose
Borrowers generally use demand loans to meet short-term financial requirements. For instance, individuals can use demand loans for purchasing raw materials, pay salaries to employees, cover the rent of workplaces, etc.
On the other hand, term loans are used for establishing new businesses. Besides this, many individuals also use term loan capital to expand their pre-existing business to enhance profits.
Tenure
The loan tenure of demand loans is at least 7 days. The lender and borrower can negotiate the tenure of demand loans depending on the circumstances and requirements.
As opposed to demand loans, term loans are granted for a more extended period, and they feature fixed tenure periods. The tenure period of a term loan can range anywhere between 1 year and 20 years. Moreover, the tenure period of demand loans cannot be negotiated.
Interest Rate
In the case of a demand loan, the interest is charged only on the amount used by the borrower and not on the entire loan amount. Moreover, the rate of interest is floating or flexible.
When it comes to a term loan, the interest is charged on the entire amount. The rate of interest can either be floating or fixed, depending on the lender’s policies.
Documentation
Demand loans are easily acquirable since applying for a demand loan does not involve providing tons of documents.
In the case of term loans, the documentation process is comparatively more complicated.
Risk Involved
Opting for and acquiring a demand loan involves less risk of default since the duration or tenure of a demand loan is very short.
In the case of a term loan, there is a higher risk of default since most term loans feature long tenure periods.
What is a Demand Loan?
A demand loan or a working capital demand loan is a variant of a loan where the financial institution lending the amount to the borrower can demand to be repaid as per their choice. This aspect of a demand loan is made clear and agreed upon by both parties at the time of processing.
In demand loans, the lender or financier can claim the lent money to be repaid in a shorter duration as opposed to other types of loans such as term loans.
Demand loans are sanctioned by lenders without fixing the repayment duration. Hence, borrowers experience the liberty of repaying the loan amount without the added responsibility of paying pre payment charges.
Customers can use the acquired demand loan’s capital to fulfill numerous financial obligations. For instance, they can use the loan capital to cover daily working capital needs and fund operations. Besides this, individuals can also use the money for making rent payments, salary payments, etc. They can also purchase raw materials, vehicles, and livestock or invest in machinery and equipment.
Features and Benefits of Demand Loans
Features:
Here are some of the prominent features of demand loans:
- Demand loans are a form of secured loans. Lenders offer demand loans against tangible assets, which the borrowers pledge as collateral.
- Demand loans’ tenures are negotiable. The terms are decided upon by the lenders.
- As opposed to other loans, demand loans are acquired by customers to fulfil short-term business requirements.
- The tenure of a demand loan must be more than 7 days (1 week).
- A demand loan’s components can be differentiated by banks over distinguished maturity periods depending on the borrower’s requirements.
Benefits:
Even though getting a demand loan is an unconventional method of financing, it offers numerous benefits to individuals. Here are some of the major ones:
- Demand loans are perfect for availing quick capital for fulfilling short-term financial obligations. Borrowers can also use it for running businesses, buying machinery and equipment, paying salaries, etc.
- The interest amount which the borrowers need to pay along with the loan amount is solely calculated on the percentage of the amount used by the borrower.
- If the borrower has sufficient funds, they can return the loan capital to the lender before the decided tenure without inculcating any additional prepayment charge or penalty.
- Borrowers can opt for a demand loan without worrying about massive equated monthly instalments or EMIs.
- Based on their liquidity, borrowers can choose to make payments in smaller amounts. Once they have enough funds, they can pay back the entire borrowed amount along with interest.
What is a Term Loan?
A term loan is a short-term loan offered to businesses by lenders for capital expenditure, expansion, and numerous other purposes. Term loans are designed to meet the financial requirements of businesses.
In a term loan, a one-time payment is made to the borrower by a bank, credit union, or online lender. Once the lender has provided the funds, borrowers use them to meet and fulfil financial obligations. Then, they are required to pay back the loan amount with added interest based on a fixed interest rate over a stipulated time period.
A term loan’s interest rate can be fixed or variable, depending on the lender. The interest rate of term loans is comparatively lower than the rates established for other types of loans or financing methods.
Even though term loans are generally acquired by individuals to meet business expenses, the capital can also be used for personal expenses. Hence, a term loan falls in the category of both business loans as well as personal loans.
There are numerous banks which offer term loans. However, the application process is complex, and banks also take a long time to disburse the loan after approval. This is one of the primary reasons why individuals prefer acquiring loans from trusted online finance platforms.
One such platform is Yubi Loans. The reputed platform facilitates businesses to get quick access to funds at competitive rates by connecting individuals with India’s top lenders. Besides term loans, individuals can get hold of multiple types of loans instantly. It is the perfect one-stop destination for all sorts of debt needs.
Features and Benefits of Term Loans
Features:
Here are some of the main features of term loans:
- Term loans are secured loans. In this type of loan, the assets financed through term loans act as the primary security. The other assets of the company serve as collateral security.
- The borrower of a term loan is obligated to repay the principal and interest amounts.
- In most cases, term loans are repayable over 5 to 10 years.
- All term loans feature a fixed interest rate. However, the rate is negotiable and can be discussed by the borrower and lender at the time of the loan’s dispersal.
- Since term loans are deemed a source of medium-term financing, their maturity period lies between 5 to 10 years.
- Borrowers have the option of converting term loans into equity according to the rules and regulations set by the financial institution.
Benefits:
Here are some of the main benefits of opting for term loans:
- As opposed to other sources of medium-term financing, it is comparatively cheaper.
- The interest incurred upon a term loan is a tax deductible expense; thus, taxation benefit is available on a term loan’s interest.
- Term loans are very flexible, i.e., they are negotiable between the two entities, namely the lender and the borrower. Since the terms and conditions are not very rigid, term loans offer flexibility.
- Term loans are representatives of debt financing; thus, the equity shareholders are not diluted.
- Term loans also benefit lenders in numerous ways. They act as a source of regular income, and since they are a form of secured loan, lenders are bound to get repaid.
Get the Best Deals on Term & Demand Loans
FAQs
Here are some of the most common queries that individuals have about
What is an example of a demand loan?
A great example of a demand loan is an overdraft arrangement. In such an arrangement, there is a predetermined maturity date and schedule of payments that individuals need to make.
Does a demand loan have a term?
Yes. The term or tenure of demand loans can range from a minimum of one week to a maximum of 52 weeks or 1 year.
Is demand loan a long term loan?
No. As opposed to other types of loans, demand loans feature a short tenure; thus, they cannot be deemed as long-term loans.
Are term loans and demand loans the same? How to differentiate between a demand and a term loan, and what is the fundamental difference between these two loans?
No. Demand loans and term loans are different from each in numerous aspects. The primary difference between the two is that if an individual opts for a loan with an extended period or tenure, it is a term loan. On the other hand, if they opt for a loan with a shorter duration or term period, it is called a demand loan.
Is demand loan a collateral-free loan?
No. Like other types of loans, demand loans also require individuals to show their assets to the lender and pledge them as collateral to proceed with the application. This is why demand loans are also referred to as secured loans or collateral loans.
Are there any pre-payment charges needed for Demand loans?
No. If the borrower wishes to close a demand loan by paying the remaining amount early, they can conveniently do so without any pre payment charges.
Can I repay my demand loan in instalments?
No. When it comes to demand loans, no lenders provide the instalment facility to borrowers. The borrower can repay the loan anytime. However, if the bank orders the borrower to repay the loan amount, they have to repay the entire loan amount as per the bank or NBFC‘s requirements.
