Demand Loans

A loan due at any time the lender decides to request payment.

A demand loan is often beneficial to the borrower, in that the repayment schedule is very open-ended. This can be especially important if the purpose of the loan was to fund a new venture that may take some time to become profitable. The borrower may make token payments from time to time as the project begins to take off, gradually increasing the amount and frequency of the payments as the generated revenue increases.

For the lender, a demand loan situation can also be quite lucrative. As with most types of loans, a demand loan structure does include the application of finance charges periodically. For the duration of the loan, the lender continues to earn interest charges on the outstanding balance.

Because a demand loan can be called at the discretion of the lender, it is also possible to take action that will minimize potential losses. Should the lender determine that the borrower is engaged in business activities that are shortly going to suffer a downturn due to economic or other changes, it may be feasible to call the loan and obtain the remaining balance before the downward spiral begins. In like manner, if the lender hears that the borrower is beginning to default on other financial obligations, the lender may choose to call the loan before the borrower can seek bankruptcy protection from outstanding creditors. [Source: Wisegeek.com]