What is a demand loan?
A demand loan, also known as a demand note, broker loan or call loan (when funds are advanced to a broker), is a loan that can be called at any time, i.e. the lender can demand full payment of the remaining balance on the money lent at any time. Before the loan is executed the borrower agrees to this arrangement.
Unlike other forms of lending, such as an installment loan, a demand loan contract makes no mention of a maturity date (when the loan expires), nor is there a schedule for making payments.
In this type of loan, the lender and borrower know each other well, they have a long-standing and good business relationship. The lender is fairly certain that the borrower will settle the debt within a reasonable period.
For the lender to agree to a demand loan, he or she must have a good business relationship with the borrower.
Demand loan useful for new ventures
A demand loan is useful for a borrower who needs capital to finance a new venture that may take some time to make money.
If the borrower wants, he or she can make token payments periodically when the venture starts to become profitable. As things take off, the payments gradually increase and become more frequent.
As long as they have confidence in the borrower, lenders like demand loans. The lender earns interest charges on the amount owed for the duration of the loan.
Demand loans are popular with brokerage houses that need short-term capital to finance the margin portfolios of clients. The borrower may repay the loan all in one go without prepayment penalties.
These types of loans may be secured or unsecured.
According to nasdaq.com, a demand loan is:
“A loan which can be called by the lender at any time and carries no set maturity date.”