Demand Loans vs Term Loans are two of the most popular loans on the market today. Both have different features and benefits and can be chosen based on the needs of the customer. But first, it is critical to understand the distinctions between these two types of loans.
Difference Between A Term Loan and A Demand Loan
What is a Demand Loan?
A demand loan, also known as a Working Capital Demand Loan or WCDL, is a type of loan with an unsecured repayment term that is typically on the shorter side and is used for short-term business needs. The lender can demand payment even at short notice, but the borrower can also repay the loan earlier than the due date without incurring penalties.
Demand Loan Features and Advantages:
The following are some of the most notable features and benefits of demand loans:
- These loans are typically given for short-term business needs such as the purchase of raw materials, the purchase of working capital, the payment of salary and office rent, and the purchase of relatively smaller assets such as equipment, cars, farm animals, and so on.
- Demand loans are secured loans, which require collateral before they can be approved.
- The loan term is less than 7 days and is determined by the lender in consultation with the borrower.
- The borrower will only be required to pay interest on the percentage of the loan that is used, which can vary from lender to lender.
- One of the most significant benefits of demand loans is that repayment terms are flexible, allowing borrowers to pay off their loans sooner without incurring additional fees. However, lenders may demand repayment at any time, including before the agreed-upon date.
What is a term loan?
The term loan is offered by financial institutions for both short and long-term periods and can have either fixed or floating interest rates. Tenure can range from a few months to about 30 years. In this case, the money is repaid through EMI, or Equated Monthly Instalments, and is usually used for business purposes. Term loans are generally best suited for long-term capital-intensive investments. There are, however, various types of term loans available for various purposes.
Term Loan Features and Advantages:
The following are the key features and benefits of term loans:
- Term loans are typically obtained for large capital requirements such as the purchase of land, expensive equipment, starting a new business, and so on.
- The repayment schedule is generally fixed, and if the borrower wishes to repay the loan early, pre-payment charges or a penalty will be imposed.
- Term loans can be secured or unsecured, which means that collateral may or may not be required. Unsecured term loans include personal loans and business loans, whereas secured term loans include gold loans.
- The interest rate charged may be fixed or variable, depending on the lending institution and the borrower’s needs.
There are various types of term loans available, including:
- Short-term loans are loans with terms ranging from 12 months to 18 months. Loans of up to 60 – 84 months are also considered short-term by some lenders.
- Intermediate-term loans, which have a repayment term of around 84 months, are generally more expensive than short-term loans.
- Long-term loans have a long repayment term of up to 30 years and have affordable EMI options for easy repayment. Typically, collateral is required for these loans.
What Is the Difference Between Demand Loans and Term Loans?
Now that we’ve covered some of the key features and benefits of Demand loans and Term loans, let’s look at how they differ –
- Demand loans are typically used for short-term business expenses and thus have a lower loan amount, whereas term loans can be used for both short-term and long-term business expenses and thus have a higher loan amount.
- Demand loans have shorter repayment terms than term loans, which can range from a few months to about 30 years.
- Borrowers are permitted to repay their loans before the end of the repayment period without penalty
- This is not the case with term loans, where repayments are made through EMIs, but early repayment may result in a penalty.
- Demand loans are secured loans, meaning they require collateral, whereas term loans can be both secured and unsecured depending on the type of loan taken out.
Conclusion
There are numerous loans available today, with term loans vs demand loans being two popular options. As borrowers, you must choose the loan that is best suited to your circumstances. Before taking out a loan, make sure you thoroughly review all of the terms and conditions.
