What is the difference between a demand loan and a term loan

Loans play an important role in meeting personal, business, and financial needs. Among the many types of loans available, demand loans and term loans are two common options. While both provide access to funds, they differ in terms of repayment, tenure, and usage.

A demand loan is a short-term loan that must be repaid when the lender demands it. On the other hand, a term loan is a loan with a fixed repayment schedule and a defined tenure. Both loans are used for different financial needs and understanding their differences could help borrowers choose the right option.

What is a demand loan
A demand loan is a short-term loan that the lender can recall or demand repayment at any time. The borrower is required to repay the entire amount when the lender issues a repayment notice. This type of loan does not have a fixed repayment schedule.

Demand loans are usually offered against collateral such as fixed deposits, shares, or property. Since they are backed by collateral, interest rates on demand loans are often lower than unsecured loans. Borrowers can use demand loans for personal needs, working capital, or other short-term financial requirements.

Features of a demand loan
Here are the key features of a demand loan to consider:
No fixed tenure
Demand loans do not have a fixed tenure. The lender can request repayment at any time.
Collateral requirements
Borrowers must pledge assets like fixed deposits, securities, or property as collateral.
Repayment on demand
Borrowers must repay the loan as soon as the lender issues a demand notice.

Lower interest rates
Since demand loans are secured, interest rates are lower than those for unsecured loans.
Flexible usage
Demand loans can be used for personal needs, business working capital, or emergency expenses.
What is a term loan
A term loan is a loan that is repaid over a fixed tenure through regular instalments or EMIs. The tenure for a term loan can range from a few months to several years. The borrower and lender agree on the repayment schedule and interest rate at the start of the loan.
Term loans are widely used for large expenses such as home purchases, business expansion, education, or buying machinery. They can be secured or unsecured, depending on the lender’s policies and the borrower’s creditworthiness.

Features of a term loan
Here are the key features of a term loan to consider:
Fixed tenure
Term loans have a fixed tenure that can range from a few months to several years.
Repayment in EMIs
Borrowers repay the loan through Equated Monthly Instalments (EMIs) over the chosen tenure.
Secured or unsecured
Term loans can be secured by collateral like property or unsecured, depending on the borrower’s credit profile.

Predefined interest rate
The interest rate is fixed or floating, and it is decided at the start of the loan.
Usage for long-term needs

Term loans are commonly used for long-term needs like home purchase, education, or business expansion.

Key differences between a demand loan and a term loan
The following table highlights the key differences between a demand loan and a term loan.

Demand loans are better suited for short-term needs, while term loans are used for long-term financial goals.
When should you consider a demand loan

A demand loan is useful when you need funds for a short-term requirement. Here are a few situations where a demand loan may be suitable.
Business working capital
Businesses often face cash flow issues due to delayed payments or seasonal demand. A demand loan could help businesses maintain smooth operations.

Short-term personal needs
Borrowers can use a demand loan to manage urgent expenses like medical emergencies or travel.
Borrowing against investments
Borrowers can pledge fixed deposits, shares, or mutual funds as collateral to secure a demand loan. This allows access to funds without selling investments.
A demand loan offers flexibility, but borrowers should be prepared to repay the loan as soon as the lender demands it.
When should you consider a term loan
A term loan is suitable for long-term financial goals or large expenses. Here are some common use cases for a term loan.

Home purchase or renovation
Term loans are commonly used to buy or renovate residential property. The repayment tenure can go up to 20 years or more.
Business expansion
Businesses use term loans to purchase machinery, equipment, or office space. This supports business growth.
Higher education
Term loans can fund higher education expenses in India or abroad. The tenure allows for easy repayment after completing the course.

Debt consolidation
Borrowers consolidate multiple high-interest debts into a single term loan with lower interest rates.
Term loans are suitable for planned expenses with fixed repayment schedules. Borrowers should assess their repayment capacity before taking a term loan.

Which loan should you choose
The choice between a demand loan and a term loan depends on the borrower’s financial needs. Here is a summary to help you decide.
Choose a demand loan if:
1. You need funds for a short-term financial gap
2. You can pledge securities like fixed deposits as collateral
3. You can repay the loan at short notice

Choose a term loan if:
1. You need funds for long-term goals like buying a home or business expansion
2. You prefer a fixed repayment schedule with EMIs
3. You want a longer repayment tenure with affordable EMIs

Role of a financial supermarket
A Financial Supermarket is an online platform where borrowers can compare loans from various lenders. It allows borrowers to view the features, interest rates, and eligibility criteria of demand loans and term loans from multiple lenders in one place.

Financial Supermarkets offer a convenient way to check loan options, submit applications, and track the status of loans. Borrowers can use these platforms to compare interest rates, tenure, and fees charged by different lenders. This helps borrowers make an informed decision.

Conclusion
Demand loans are ideal for short-term needs, while term loans suit long-term financial goals. Demand loans offer flexibility but require prompt repayment, whereas term loans have fixed EMIs and a set tenure. Borrowers should assess their financial needs and repayment capacity before choosing a loan. Using a Financial Supermarket could simplify the selection process.