Demand Loan vs. Term Loan

When choosing to make large purchases, access to capital plays a crucial role. Term loans and demand loans provide easy access to financing, whether it for larger personal purchases, or towards growing your business. 

However, it is important to understand the difference between demand loan and term loan. These two loan types serve very different purposes and can significantly impact your financial planning. Key factors when deciding between demand loan vs term loan include flexibility, stability, and the duration. In this article, we shall break down the difference between demand loan and term loan to help you make an informed and appropriate decision.

What is a Term Loan?

A term loan is a short-, medium- or long-term loan with a fixed due date and repayment schedule. A term loan undertaken for personal or business purchases can help ease the pressure on savings and income while simultaneously providing the borrower with a stable, reliable payment plan.

Key Features of Term Loans:

Fixed tenure 

The tenure is predetermined and may be anywhere between 1 to 30 years, depending on the nature of the loan.

Fixed payment schedule

The loan is to be paid off in fixed installments which contribute first towards the interest, and then towards the principal amount. These installments are due periodically, most often on a monthly or quarterly basis.

Predictable interest calculation

An interest is charged upon the entire amount of the sanctioned loan. Further, a fixed interest rate is generally applied. These features enable reliable budgeting decisions for long term financial planning.

Therefore, a term loan works best for those who need a predictable and stable repayment plan which can be relied upon for securely budgeting long term expenses.

What is a Demand Loan?

A demand loan is a short-term loan aimed at providing liquidity and flexibility. A demand loan can ease the needs of urgent, short-term liquidity that requires a flexible repayment approach.

Key Features of Demand Loans:

No fixed tenure, due date

Demand loans are generally issued for short-term expenses. However, unlike a term loan with a fixed due date, the tenure of a demand loan is not fixed when the loan is sanctioned. The due date is decided when the lender issued a demand notice, at which time the entire amount borrowed becomes due.

Flexibility of payment schedule

There is no fixed payment schedule for the demand loan. Unlike a term loan, the borrower is not required to make fixed monthly or quarterly payments to the financial institution. However, the borrower has the freedom to repay the loan – in full or in part – at any time before a demand notice is issued by the lender, without incurring any prepayment charges.

Variable interest rates

Demand loans are generally offered at variable or floating interest rates. Further, the financial institution charges an interest only on the amount actually used, not on the entire amount that has been sanctioned.

Therefore, demand loans are perfect for businesses or individuals who need quick funds and can handle flexible repayment terms. This offers quick liquidity for short term expenses, without creating an immediate burden of repayment. These are commonly used for working capital, bridge financing, or for urgent purchases.

Term Loan vs Demand Loan: A Quick Comparison

Which Loan is Right for You?

Choosing between a term loan and a demand loan depends on what you need:

Choose a Term Loan: If you are planning for big investments like expanding your business, buying property, or acquiring machinery. The predictable repayment schedule makes it easier to budget.

Go for a Demand Loan: If you need funds for short-term purposes, like managing working capital or bridging a temporary gap in cash flow. Its flexibility can be a lifesaver for urgent needs.

The bottom line

Both term loans and demand loans offer unique benefits, depending on your needs. While term loans are designed for stability and long-term financing, demand loans give you short-term flexibility. The right choice depends on your financial goals, repayment capacity, and the purpose of the loan.

At Tata Capital, we’re here to help you every step of the way. Whether you’re looking for funds to grow your business or need a quick financial boost, our range of loan options can cater to your requirements. Tata Capital offers small personal loans with no collateral, minimal documentation, attractive personal interest rates and easy EMI calculation through our personal loan calculator. Our range of working capital demand loans can also help address short-term financing for your business.