Demand loans are loans where there is no maturity date and are payable at any time, at the discretion of the lender.
Payments are made on the interest of the loan only until the principal is paid off or the lender demands repayment of the loan in full.
Demand loans can be tricky and troublesome if you do not have a means to quickly pay the loan back when it's demanded or called in.
When you take on a demand loan, you are taking on a certain level of risk not typically associated with other loans, such as
Term Loans and
Time Loans. Let's look
at an example of why a demand loan can be dangerous.
David walks into a bank and borrows $25,000 on a demand loan. David uses the $25,000 as a down-payment for a land purchase, taking on
the risk that the bank may call in (demand) the loan repayment at any given time. Shortly after his land purchase, the bank calls in
the loan and requests immediately payment. David does not have any other liquid assets available to pay for the loan and thus has to
sell the land, which he purchased with the initial loan, at a distressed price in order to meet the terms of the loan contract. In
this scenario the demand loan was a bad loan choice for David and it ended up causing him financial stress.
When it comes to loan, the most important thing is to know what you're getting into. The last thing you want to do is default on a loan.
The banks are lending you the money in good faith and it's up to you to keep that faith by paying back what you've borrowed. One of the
keys to turning the loan into a successful venture is to avoid loans that are not right for your situation. We hope you now understand
the potential risks associated with
demand loans!