What is Difference Between Term Loan and Demand Loan?

Loan in simple words refers to taking the money now and paying back that money later with interest to the borrower. It can be of many types, term and demand loans are two of its variants, let’s look at some of the differences between term and demand loan –

Term loan refers to those which have a fixed tenure and it has to be repaid by the borrower on fixed maturity date and also they have fixed repayment schedule whereas demand loan as the name suggests are those which can demanded by the bank or financial institution anytime and the borrower has to repay it within short period of time which may range from 1 to 7 days depending on the policy of the bank which has given the loan.

Term loan is for a long period of time which may range from 1 year to 20 years whereas demand loan is for short period of time. Hence people who require funds for long period will go for term loan and those who require funds for short period of time will go for demand loan.

Vehicle loan, educational loan, housing loan are some of the examples of term loan while loan against fixed deposit, overdraft facility are some of the examples of demand loan.

In case of term loans there is prepayment penalty implying that if you pay off your entire loan before repayment date then bank or financial institution will impose penalty whereas in case of demand loan there is no such prepayment penalty.

In case of term loan interest is charged on the total amount sanctioned for the loan whereas in case of demand loan interest is charged only on the amount utilized and not on total amount sanctioned, so for example if an individual has taken $5000 but he or she has utilized only $2000 then interest in case of demand loan will be charged on $2000 whereas in case of term loan interest will be charged on $5000.

As one can see from the above that there are many differences between the two and individual should keep in mind his or her requirement, time period for which debt is required and also liquidity factor before taking term or demand loan.