What Are the Actual Differences Between a Demand Loan and a Term Loan?

Availing a loan helps a business unit or an individual to convert their potential into reality as steady cash flow facilitates growth and doesn’t hamper productivity and output.

Thus, a loan may work as a catalyst by minimising financial crunch and ensuring smooth flow of operations.

To avail loan for a specific purpose, it is essential to understand two crucial subsets of loans and accordingly apply to reap its benefits.

A demand loan and a term loan belong to different categories, each with its specific features. The borrower needs to keep in mind whether he wishes to grow his business further by availing term loan or wants to catch-up with daily operational expenses with a demand loan. In both cases, renowned financial institutions like Bajaj Finserv offer competitive interest rates and a bouquet of benefiting features for customers to avail.

A correct understanding of the various features of both types of loans can help a borrower make a right and informed choice accordingly.

Demand Loan

 

The basis of the difference:

 

  • Tenure

In case of term loans, funds granted by a financial institution have a predetermined tenure ranging from 1 to 20 years. However, a demand loan (also called Call Loan), as the name suggests, can be called off any time by the lender. This short-term finance generally lasts for few months only.

  • Purpose

Disbursal of term loans is generally granted for longer tenor due to the gestation period to generate revenues. The loan amount is used for purposes like renovation, establishing a start-up or buying machines for manufacturing goods, etc.

Demand loans are primarily designed for short-term purposes like adding liquidity to daily operations, paying salaries or keeping cash for near unforeseen expenses in the form of account payables.

  • Loan amount

Since a term loan lasts for a longer duration, generally, the loan amount is more and can be fully utilised upfront. While in case of demand loan, the amount disbursed is less and can also be utilised fully or in parts unlike a term loan.

Term loans facilitate the borrower with a cap on his loan amount. The borrower can use those funds as and when required.

  • Interest levied

A term business loan is charged at either fixed or floating interest rates to be paid through equated monthly instalments as per the terms accepted by the borrower. The interest rate is levied on full loan amount.

But in case of demand loans, the interest is levied only on the utilised amount rather than on total amount disbursed.

  • Prepayment charges

Term loan has a specific repayment schedule, divided into EMIs to be paid throughout the entire tenure of the loan. But in case the borrower plans to prepay the term business loan amount before its maturity, then specific prepayment charges are to be borne by the borrower. However, in case of a demand loan, the borrower pays when he/she has the amount in surplus or whenever the lender demands and no prepayment charges are levied on the borrower.

  • Security

A business term loan can be secured or unsecured depending on the longevity and risk factor in the loan. But in significant cases, to avail long-term loans, an asset from the borrower is pledged with the lender as security to the availed funds.

Demand loans, comparatively, are disbursed for shorter duration and for a lesser amount, without mortgaging any property or any other security. However, other considerations like CIBIL score, cash flow statements, etc. are considered.

  • Examples

Educational and home loans are long duration loans with fix maturity date. These can be classified under term loan while loan against fixed deposit and overdraft facility classify as demand loan.

Understanding these fundamental differences will help the borrowers avail loans as per the current need and their end use with pros and cons of each.

Various financial intermediaries provide these funding options, but with proper knowledge of these loans and as per circumstances prevailing in the business, one can make the best choice in one’s business’s interest.

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