What is a Demand Loan?

A Demand Loan is one that is provided by a lender who is empowered with the option of demanding full payment of the outstanding balance at will.     

How Does A Demand Loan Work?

A demand loan differs from an installment loan in that while the latter allows the borrower to set up a payment plan with a maturity date and a time limit to pay off the loan in full, a demand loan does not. This short-term loan is usually arranged between lenders and borrowers who have worked together in the past and have developed a level of trust. 

Who Benefits From A Demand Loan?

The flexibility of a demand loan can greatly assist a borrower who is investing in a venture that may take some time to turn a profit because he has the option of making payments whenever possible. The lender benefits because without a set payoff date the finance and interest charges continue to accrue.

Pitfalls abound, however, as the lender has the option of “calling in” the loan at any time. This can be a serious issue if the borrowed does not have the available liquidity to satisfy the balance. This scenario most often occurs when the lender loses confidence in the borrower's ability to pay. If the lender finds that the borrower is falling behind on other obligations, he may call in the loan before the borrower is able to take measures to gain protection from creditors.