Demand loans are loan agreements that provide the lender with the ability to demand full payment of the remaining balance of the loan at any point in time after the loan is executed. Unlike an installment loan, the demand format does not include a specific maturity date and may not include a specific schedule for making payments to retire the debt. Sometimes referred to as a call loan, a demand loan is usually employed when the lender and borrower have a long standing and positive business relationship, and the lender has confidence that the borrower will pay off the loan within a reasonable period of time.
A demand loan is often beneficial to the borrower, in that the repayment schedule is very open-ended. This can be especially important if the purpose of the loan was to fund a new venture that may take some time to become profitable. The borrower may make token payments from time to time as the project begins to take off, gradually increasing the amount and frequency of the payments as the generated revenue increases.
For the lender, a demand loan situation can also be quite lucrative. As with most types of loans, a demand structure does include the application of finance charges periodically. For the duration of the loan, the lender continues to earn interest charges on the outstanding balance.
Because a demand loan can be called at the discretion of the lender, it is also possible to take action that will minimize potential losses. Should the lender determine that the borrower is engaged in business activities that are shortly going to suffer a downturn due to economic or other changes, it may be feasible to call the loan and obtain the remaining balance before the downward spiral begins. In like manner, if the lender hears that the borrower is beginning to default on other financial obligations, the lender may choose to call the loan before the borrower can seek bankruptcy protection from outstanding creditors.
While a loan that is repayable on demand does not work for every situation, many companies have established strong working relationships with banks and other financial partners and make use of a demand loan process on a regular basis. Generally, if the balance of the loan is paid back within a relatively short period of time, the lender is more than happy to embark on a second demand loan arrangement with the borrower.