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Term loans and demand loans are two different loan options you can choose from. While the purpose of both loans is the same, they have significant differences in terms of features and benefits.
When it comes to borrowing loans, term loans and demand loans are two loan options that tend to confuse a lot of individuals. Although the purpose of both loan types is to provide financial stability to the borrowers, they differ in terms of their features and advantages.
In this blog, we will outline the detailed difference between demand loans and term loans to help you make the right choice.
Term Loan Meaning
Term loan refers to a type of loan that comes with a fixed repayment period, which usually ranges from 1 to 10 years. The borrower can make part or full payments over the repayment period to avoid the penalties. Further, this type of loan is mainly borrowed by individuals and businesses to finance larger purchases such as real estate or equipment.
Demand Loan Meaning
Also known as a Working Capital Loan (WCL), a demand loan refers to a type of loan in which the repayment term is not fixed. It is usually offered for short-term business requirements and has a shorter but flexible repayment period. Further, this type of loan is only provided for the borrower with a reliable income source and a good credit history.
Difference Between Demand Loan and Term Loan
Suitability
The choice of term loan vs demand loan depends on the individual needs and financial situation. Essentially, demand loans are intended for individuals who need immediate funding and want to repay the loan amount at their convenience. These are short-term loans used for managing financial emergencies and sudden expenses.
On the contrary, term loans are intended for borrowers who require a large amount and longer repayment tenure. For these reasons, they are suited for businesses that need funding for large purchases and other business projects.
Repayment Term
A repayment term is perhaps the biggest difference between demand loan and term loan. Demand loans have no fixed maturity date. It means you can repay the loan via full or partial payment anytime you want. This makes them ideal for borrowers who require immediate funds and are capable of repaying the loan quickly.
On the other hand, term loans come with a set maturity period. In this case, you can not repay the loan earlier, and doing so may result in hefty penalties. Simply put, you have to stick to the fixed schedule laid down by your lender.
Repayment Flexibility
Demand loans are generally more flexible than term loans. From borrowing the fund to repaying it, everything can be done at the convenience of the borrower. This is the reason why demand loans are a reliable funding option for businesses with unexpected expenses and irregular income.
Term loans, on the other side, offer little to no flexibility to the borrowers. Hence, they are used by businesses with a steady but regular flow of income.
Interest Rates
Interest rate is another major differentiating factor between demand and term loans. Typically, demand loans come with higher interest rates as compared to term loans. The reason behind this is very obvious: demand loans offer quick access to funds and also offer greater flexibility in loan repayment to the borrowers.
On the other hand, term loans come with lower interest rates as they have a fixed repayment schedule.
In the case of demand loans, the interest rate is calculated on a weekly or daily basis and is usually charged on the outstanding loan amount. It means the interest rate will increase according to the increase in loan balance. The borrower can reduce the interest rate by paying the loan on time.
In the case of term loans, the interest rate is calculated by taking into consideration factors such as the loan amount, creditworthiness of the borrower, loan tenure, etc.
Collateral
Another key difference between demand loan and term loan is their collateral requirement. Because demand loans are unsecured, they do not require any collateral in most cases. These types of loans are solely sanctioned on the basis of the creditworthiness of the borrower.
On the contrary, term loans are secured and require collateral such as real estate, equipment, inventory, and so on. The collateral is used as a risk mitigation tool by the lender for offering a bigger amount for a longer period.
Quick Glance at Term Loan Vs Demand Loan
Feature |
Term Loan |
Demand Loan |
Purpose |
Used for large fund requirements such as purchase of property, equipment, machinery, etc. |
Used for short-term requirements such as paying salary, purchasing raw materials, etc. |
Capital |
Higher loan amount. |
Lower loan amount as compared to demand loan. |
Collateral |
May or may not be required depending upon the loan amount. |
Required |
Repayment Term |
Longer repayment terms ranging from 1 to 10 years. |
Shorter repayment terms ranging from a few days to months. |
Repayment Flexibility |
Borrowers can only repay the loan after its maturity. Early repayment can lead to penalties. |
Borrowers can repay anytime they want without facing any penalty. |
Final Questions
That is everything you need to know about term loans vs demand loans. We have discussed all the major differences between both types of loans and their suitability for different borrowers.
If you need immediate funding for a shorter duration, then a demand loan is the best option for you. However, if you need a significant amount of money with a longer repayment term, then you should consider getting a term loan.
Regardless of the loan you choose, do not forget to secure your business with the right SME insurance from a reliable provider. It will ensure complete protection of your business against unprecedented losses and risks.
