When it comes to borrowing money from financial institutions, businesses, and individuals have a variety of options to choose from. Two of the most common types of loans are demand loans and term loans.
While both serve the same purpose of providing funds to borrowers, there are significant differences between the two.
In this blog post, we will explore the difference between demand loans and term loans, and help you decide which type of loan is best suited for your financial needs.
Demand Loan vs Term Loan
Demand Loan
A demand loan, also known as a call loan or overdraft loan, is a type of loan that allows the borrower to withdraw funds from the lender as and when required.
In other words, it is a loan with no set maturity date, and the borrower can repay the loan in full or in part at any time.
Demand loans are usually offered to individuals and businesses with good credit ratings and a reliable source of income.
Term Loan
On the other hand, a term loan is a type of loan that is repaid over a set period, usually ranging from one to ten years.
The repayment schedule of a term loan is usually fixed, with the borrower making regular payments over the life of the loan.
Term loans are often used by businesses to finance large purchases, such as equipment or real estate, and are typically secured by collateral.
Difference between Demand Loan and Term Loan
Repayment Schedule
The repayment schedule is one of the main differences between demand loans and term loans. Demand loans have no set maturity date, and the borrower can repay the loan in full or in part at any time.
Here are few options through which you can repay your loan.
As such, demand loans are ideal for borrowers who need immediate access to funds and want the flexibility to repay the loan when they can.
These loans are typically short-term loans and are suitable for financing unexpected expenses, emergencies, or working capital needs.
On the other hand, term loans have a fixed repayment schedule, with regular payments made over a set period.
The repayment schedule is usually based on the loan amount, the interest rate, and the loan term. The borrower must make the required payments, typically monthly or quarterly, until the loan is fully paid off.
Term loans are ideal for borrowers who require funds for long-term projects or investments, such as purchasing equipment or property.
Interest Rates
Another significant difference between demand loans and term loans is the interest rate. Demand loans typically have higher interest rates than term loans.
This is because demand loans are more flexible and offer borrowers greater access to funds. In contrast, term loans have lower interest rates as they have a fixed repayment schedule, which makes them less risky for the lender. Do read this article if you are looking for business loan at lower interest rates.
When it comes to demand loans, the interest rate is usually calculated on a daily or weekly basis and is charged on the outstanding balance of the loan.
This means that the interest expense will increase as the loan balance increases. However, the borrower has the flexibility to pay off the loan at any time, which can help reduce the interest expense.
On the other hand, term loans have a fixed interest rate that is agreed upon at the time of borrowing. The interest rate is based on various factors, such as the creditworthiness of the borrower, the loan amount, and the loan term.
Unlike demand loans, the interest expense on term loans remains the same throughout the loan term, making it easier for the borrower to budget for loan payments.
Collateral
Collateral is another significant difference between demand loans and term loans. Demand loans are typically unsecured, meaning they do not require collateral.
These loans are based on the borrower’s creditworthiness and are ideal for borrowers who have a good credit rating and a reliable source of income.
On the other hand, term loans are often secured by collateral, such as equipment, real estate, or inventory. This is because the lender has a greater risk in providing a long-term loan and requires security to mitigate this risk.
In the event that the borrower defaults on the loan, the lender can seize the collateral to recover their losses.
Flexibility
Demand loans offer greater flexibility than term loans. With a demand loan, the borrower can access funds as and when required and repay the loan at any time without incurring a prepayment penalty.
This makes demand loans ideal for businesses or individuals who have irregular income streams or unpredictable expenses.
On the other hand, term loans are less flexible as they have a fixed repayment schedule that must be followed. While some lenders may allow borrowers to make early repayments, this may come with a prepayment penalty.
As such, term loans are better suited for borrowers who have a steady income stream and can commit to regular loan payments.
Suitability
Finally, the suitability of demand loans and term loans depends on the borrower’s financial needs and circumstances.
Demand loans are ideal for borrowers who need immediate access to funds and want the flexibility to repay the loan when they can.
These loans are typically short-term loans and are suitable for financing unexpected expenses, emergencies, or working capital needs.
On the other hand, term loans are ideal for borrowers who require funds for long-term projects or investments, such as purchasing equipment or property. Know details of Machinery Loans or Equipment Loans in this article.
These loans have a fixed repayment schedule and lower interest rates, making them suitable for borrowers who can commit to regular loan payments and have a reliable source of income.
| Feature | Demand Loan | Term Loan |
| Repayment Schedule | No set maturity date | Fixed repayment schedule |
| Interest Rates | Higher interest rates | Lower interest rates |
| Collateral | Typically unsecured | Often secured by collateral |
| Flexibility | Greater flexibility | Less flexibility |
| Suitability | Short-term needs | Long-term projects |
Conclusion
Choosing between a demand loan vs a term loan ultimately depends on your financial needs and circumstances. If you require funds for a short period and want greater repayment flexibility, then a demand loan may be the right option for you.
However, if you need funds for a longer period and want to benefit from lower interest rates, then a term loan may be the better option.
It is always recommended to do your research and compare different loan options before deciding to ensure you make the right choice for your financial needs.