It is quite challenging to manage everything, right from basic needs like education, food, house, and clothes to luxurious facilities like infrastructure, personal transportation, etc. It is correct that due to inadequate funds, many of us get deprived of all these amenities. Thus, in a time of emergency or lack of money, you could get a loan to meet your requirement from a personal lender.
There are two kinds of loans to choose from, secured loan and unsecured loan, and further, there are many subcategories like demand loan, term loan, etc. So, individuals who want to borrow money from any lender must know the difference between Demand Loan and Term Loan. These terms are applied based on interest rates, repayment schedules, and loan tenure. Let’s look at the actual difference a between term loan and demand loan on the basis of some important factors like purpose, tenure, security, and much more. Here are listed below some of the major differences between them which makes them different from each other. Have a look at each
Difference Between Demand Loan vs Term Loan:
- Basic Difference
Term loans are basically like those traditional loans, like personal loans, which have a fixed rate of interest, loan tenure, and may or may not need collateral to get approved.
A demand loan is a short term loan that does not have fixed tenure, and also has floating interest rates. Demand loan, often known as Working Capital Demand Loan, is a kind of loan that is ready to be repaid on demand of the lenders. The lenders can ask for the borrowed money to be repaid at any point in time. Also, even the borrowers have the right to repay the loan amount anytime without facing any prepayment charges.
People mostly avail a demand loan to meet the working capital financial demand such as the purchase of small appliances, raw materials or repaying short-term credits.
Term loans are mostly sanctioned for starting a brand-new business or expansion of current business, machine for setting up a factory, purchase of land, etc.
Generally, lenders grant demand loans for a short term ranging from 7 days to a few months.
And, on the other hand, a term loan is granted for a medium to long term ranging from 1 year to 20 years.
Lenders grant demand loans against some security such as goods or stocks, land building, shares, or any other assets. They hold the collateral for security purposes till the time the loan is repaid.
In the case of a term loan, mortgage of plant, land, machinery, and building can be used as collateral to avail the loan.
In case of a demand loan, lenders charge interest on the amount utilized by the borrowers instead of the entire loan amount.
In the term loan, interest rates are charged on the total amount granted as a loan.
Demand loans have an open-ended repayment schedule. The borrowers can repay the loan amount anytime they want without any hassle. So, whenever a borrower has some surplus amount, they can use it for repayment without facing any additional charges. But they are also subjected to repay the entire loan amount whenever the lender demands.
Whereas, term loans have a specified repayment term with fixed monthly installment facilities. You can easily get the approximate estimation of the amount to be paid each month using a business loan EMI calculator.
In the case of a demand loan, there is no such penalty for prepayment of the loan, which is quite normal to other loans with a fixed repayment period.
In the case of a term loan, the borrower has to pay a penalty amount in case of repayment of their borrowed money before the end of the loan tenure.
The documents required for demand loans are ID and Address proof, Existing track record, Balance sheet and other supporting financials, Valuation report, Income viability sheet, Non-encumbrance, and Title report.
And, the documents required to avail of a term loan are Identity proof, Ownership proof, Address Proof, and Business continuity proof.
Now that you have an idea or you may learn the difference between a term loan and a demand loan, now you can go ahead easily and avail a loan that meets all your requirements.