Before we going through difference between Demand Loan and Term Loan, Lets try to understand LOAN. Loan in simple words is borrowing a sum of money now and paying back that money to lender with interest at a later stage. Loan is disbursed for specific purpose and for a predetermined period. There are different types of Loans available to choose among – Demand Loan and Term loans are one of them.
People who are looking to borrow money from any bank or financial institution must know the difference between Demand Loan and Term Loan. These terms are used on the basis of how interest is charged, repayment schedule, tenure of the loan.
There are many types of categories of Loan – Credit Card Loan, Personal Loan, demand loan, term loan etc.
Here we will discuss the basic difference between Demand Loans and Term Loans.
Difference between DEMAND LOAN and TERM LOAN
Demand Loan (also called Call Loan), refer to short term loan which are repayable on demand by the lender. The bank or financial institution can call the repayment at any time. It is best for small or large businesses, needed loans for short period.
On the other hand, Term loans are granted for a specific period of time with fixed repayment schedule. Rate of Interest may be fixed or floating. Term Loans are extended for a longer duration of time.
Demand loans are generally granted for short period ranging from few days to several months whereas in case of term loan, tenure may range from 1 to 20 years.
Demand loans have open ended repayment schedule. Borrower, can repay the amount when he or she has surplus funds OR must paid on demand by the lender.
Term Loans have a specified repayment schedule with fixed installment. Interest is charged on amount of loan disbursed or principle amount.
In case of Demand Loans, Lender charge the interest on the amount of loan used by the borrower, not on whole amount of loan.
But in case of term loans, Interest is charge on whole amount of loan sanctioned.
Lender or bank may impose penalty in case you pay off the entire amount of loan before repayment date while in case of demand loan there is no such prepayment penalty.
Demands loans are generally granted for meeting working capital finance need like purchase of raw materials, paying off short term liabilities.
Terms loans are granted for purpose of starting a new business, renovation, expansion of business, purchase of land, plant, machinery for setting up factory, construction of factory building, purchase of fixed assets etc. Which may also serve as prime security.
Demand loans are granted by bank or lender against security which may include goods or stock, shares , land building or any other assets.
While in case of term loans, security may be mortgage of land, plant and machinery, building etc.
So now you are able to easily differentiate between Demand Loan and Term Loan. Before availing any type of loan you should keep in mind about Tenure of Loan, amount of loan, rate of interest , repayment schedule, purpose etc.