When choosing to make large purchases, access to capital plays a crucial role. Term loans and demand loans provide easy access to financing, whether it for larger personal purchases, or towards growing your business.
However, it is important to understand the difference between demand loan and term loan. These two loan types serve very different purposes and can significantly impact your financial planning. Key factors when deciding between demand loan vs term loan include flexibility, stability, and the duration. In this article, we shall break down the difference between demand loan and term loan to help you make an informed and appropriate decision.
What is a Term Loan?
A term loan is a short-, medium- or long-term loan with a fixed due date and repayment schedule. A term loan undertaken for personal or business purchases can help ease the pressure on savings and income while simultaneously providing the borrower with a stable, reliable payment plan.
Key Features of Term Loans:
Fixed tenure
The tenure is predetermined and may be anywhere between 1 to 30 years, depending on the nature of the loan.
Fixed payment schedule
The loan is to be paid off in fixed installments which contribute first towards the interest, and then towards the principal amount. These installments are due periodically, most often on a monthly or quarterly basis.
Predictable interest calculation
An interest is charged upon the entire amount of the sanctioned loan. Further, a fixed interest rate is generally applied. These features enable reliable budgeting decisions for long term financial planning.
Therefore, a term loan works best for those who need a predictable and stable repayment plan which can be relied upon for securely budgeting long term expenses.
What is a Demand Loan?
A demand loan is a short-term loan aimed at providing liquidity and flexibility. A demand loan can ease the needs of urgent, short-term liquidity that requires a flexible repayment approach.
Key Features of Demand Loans:
No fixed tenure, due date
Demand loans are generally issued for short-term expenses. However, unlike a term loan with a fixed due date, the tenure of a demand loan is not fixed when the loan is sanctioned. The due date is decided when the lender issued a demand notice, at which time the entire amount borrowed becomes due.
Flexibility of payment schedule
There is no fixed payment schedule for the demand loan. Unlike a term loan, the borrower is not required to make fixed monthly or quarterly payments to the financial institution. However, the borrower has the freedom to repay the loan – in full or in part – at any time before a demand notice is issued by the lender, without incurring any prepayment charges.
Variable interest rates
Demand loans are generally offered at variable or floating interest rates. Further, the financial institution charges an interest only on the amount actually used, not on the entire amount that has been sanctioned.
Therefore, demand loans are perfect for businesses or individuals who need quick funds and can handle flexible repayment terms. This offers quick liquidity for short term expenses, without creating an immediate burden of repayment. These are commonly used for working capital, bridge financing, or for urgent purchases.
Term Loan vs Demand Loan: A Quick Comparison
Feature
Term Loan
Demand Loan
Tenure
Fixed, and may vary between 1 to 30 years based on the nature of the loan.
No fixed tenure, but generally between 7 days and a few months.
Repayment
Regular installments.
On-demand repayment.
Purpose
Long-term investments.
Short-term liquidity needs.
Interest
Charged on the full amount of the loan.
Charged on the amount actually used.
Interest Rate
Fixed or variable.
Generally variable.
Collateral
Often required.
May or may not be required.
Flexibility
Less flexibility, as a penalty may be incurred for not abiding to the payment schedule.
Offers a higher flexibility, as early payment is not penalised.
Which Loan is Right for You?
Choosing between a term loan and a demand loan depends on what you need:
Choose a Term Loan: If you are planning for big investments like expanding your business, buying property, or acquiring machinery. The predictable repayment schedule makes it easier to budget.
Go for a Demand Loan: If you need funds for short-term purposes, like managing working capital or bridging a temporary gap in cash flow. Its flexibility can be a lifesaver for urgent needs.
The bottom line
Both term loans and demand loans offer unique benefits, depending on your needs. While term loans are designed for stability and long-term financing, demand loans give you short-term flexibility. The right choice depends on your financial goals, repayment capacity, and the purpose of the loan.
At Tata Capital, we’re here to help you every step of the way. Whether you’re looking for funds to grow your business or need a quick financial boost, our range of loan options can cater to your requirements. Tata Capital offers small personal loans with no collateral, minimal documentation, attractive personal interest rates and easy EMI calculation through our personal loan calculator. Our range of working capital demand loans can also help address short-term financing for your business.
The tenure of a demand loan is at least 7 days. Apart from this, the tenure is not fixed. The borrower can make a full or part payment at any time, and repayment is required whenever the lender issues a demand notice.
What are the three types of term loans?
The three types of term loans are short-term loans, medium or intermediate term loans, and long-term loans.
What is the maturity date of a demand loan?
The maturity date for a demand loan is not fixed. It is determined by when the lender requests repayment by issuing a demand notice. However, you can repay a demand loan in part or in full at any time before repayment has been requested.
What is the maximum tenure of a term loan?
The maximum tenure of a term loan can go up to 30 years, depending on the loan type and lender policies.
13 February 2025
5 mins read
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