What is a demand loan? Definition and meaning
A demand loan is a loan that the lender can call at any time. We also use the terms demand note, broker loan, or call loan (when a broker is the borrower) with the same meaning. Put simply; the lender can demand full payment of the remaining balance on the loan at any time. Before the lender grants this type of loan, the borrower agrees to the arrangement.
Unlike other loans, such as an installment loan, a demand loan contract makes no mention of a maturity date. The maturity date is when the loan expires.
Additionally, there is no schedule for making payments on this type of loan.
In this type of loan, the lender and borrower know each other well. Both parties have a long-standing and good business relationship.
The lender is fairly certain that the borrower will settle the debt within a reasonable period.
Demand loan useful for new ventures
A demand loan is useful for a borrower who needs capital to finance a new venture. In most cases, the venture may take some time to make money.
The borrower can make token payments periodically when the venture starts to become profitable. As things take off, the payments gradually increase and become more frequent.
Lenders like demand loans. However, they must have confidence in the borrower. The lender earns interest charges on the amount the borrower owes for the duration of the loan.
Brokerage houses like demand loans
Demand loans are popular with brokerage houses that need short-term capital to finance their clients’ margin portfolios. The borrower may repay the loan all in one go without prepayment penalties.
There are ‘secured’ and ‘unsecured’ demand loans.
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.”