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Key Differences Between Demand Loans and Term Loans
When borrowing money for business purposes, you have two main options: term loans and demand loans. A demand loan is a short-term loan you must repay to the lender at their request. On the other hand, term loans have longer terms with fixed repayment tenures. In the following sections, we will delve deeper into demand loans vs. term loans while understanding their features, benefits, and suitability for various financial requirements. Understanding these loan types will allow you to make an informed borrowing decision without stretching your finances.
What are Demand Loans?
Demand loans, also known as overdraft loans, allow you to withdraw money from the lenders when needed. Simply put, they don't have a pre-determined maturity date. You can repay the part or full loan at any time. Businesses and individuals with reliable income sources and good credit scores often qualify for these loans.
Read Also: What Is a Term Loan – Types, Example & Steps to Apply Online
What are Term Loans?
Term loans are fixed-amount loans you borrow from lenders and repay them over a pre-determined repayment tenure. These loans have fixed repayment schedules that require you to make regular EMI payments over the loan term. Business owners often use these loans to finance big-ticket expenses like purchasing real estate, equipment, etc. These can be secured or unsecured based on the loan type and lender’s policy.
Difference Between Demand Loans Vs Term Loans
Wondering what is the difference between term loan and demand loan? Below are the major points of difference between the two:
| Parameters | Demand Loan | Term Loan |
| Usage | A demand loan is an excellent funding option to raise short-term capital for businesses to cover regular expenses like salaries, raw materials, rent, etc. | New businesses can successfully use term loans to achieve their goals and expand their horizons. |
| Tenure | A demand loan has shorter repayment durations ranging from a few days to months. You may negotiate this term in the loan agreement. | A term loan has a longer repayment tenure of 12 to 60 months. Once agreed, the term remains fixed, and you must repay the loan within that period in monthly EMIs. |
| Interest Payment | In the case of a demand loan, you must pay the interest only on the amount you withdraw from your credit limit. | If you borrow a term loan, you must pay interest on the entire borrowed amount, irrespective of its utilisation. |
| Repayment | You can repay a demand loan at any time according to your convenience and the lender's demand without paying additional charges. | In a term loan, interest is chargeable on the loan amount, and the repayment tenure is pre-determined. You must repay it in EMIs according to the loan agreement signed at commencement. |
| Security | A demand loan is secured against collateral, such as land or real estate property. | A term loan can be unsecured, which you can obtain without collateral or secured against a residential or commercial property, machinery, inventory, etc. |
Read Also: Working Capital Demand Loan (WCDL) - Definition & Meaning
Interest Rate of Demand Loans and Term Loans
Now that you know what is a term loan and a demand loan, let's look into the differences in their interest rates. Although both demand and term loans are funding options that you must repay to the lender with interest, there is a difference between term loans and demand loans in terms of their interest rates. Let’s dive deeper into this aspect.
| Parameter | Demand Loan | Term Loan |
| Rate | Interest rates on demand loans are higher than term loans. | Interest rates on term loans are lower than on demand loans. |
| Interest Payment | If you borrow a demand loan, you must pay interest only on the amount you withdraw from your credit limit. | If you borrow a term loan, you must pay interest on the entire principal amount whether you use the loan amount or not. |
| Type of Interest | Demand loans have floating interest rates that are subject to market fluctuations. | Term loans have fixed interest rates that the lender determines when approving the loan application. |
Read Also: Choosing between Short term and Long term loans
Required Documents for Demand Loans and Term Loans
The documentation requirements for demand loan vs. term loan vary according to the lender’s policy. Here are some standard documents you must provide to borrow the loan you require:
To apply for a demand loan, you must provide the following documents:
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Identity proof
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Address proof
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Income viability sheet
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Current track record
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Supporting financials like balance sheet
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Valuation Report
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Income proof
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Title report or non-encumbrance
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Property insurance copy
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Inspection report
To apply for a term loan, you must provide the following documents:
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PAN Card
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Identity proof like an Aadhaar card, passport, driving license, voter ID card, etc.
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Address proof like an Aadhaar card, driving license, voter ID card, registry copy, utility bill, property tax receipt, rent or lease agreement, etc.
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Business continuity proof like service tax registration, trade license, sales tax, copy of partnership deed, certificate of practice, etc.
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Signature proof like PAN card, passport, banker's verification, etc.
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Income proof like the latest ITR, GST returns, latest audited financials, bank statements, etc.
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List of Directors
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Shareholding patterns
The process to Apply Demand Loan
Now that you understand what a demand loan is, often used for working capital requirements in business, and wish to apply for one, these are the steps to follow:
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Visit the lender’s website.
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Click on the ‘Apply’ button.
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Enter the OTP you receive on your 10-digit mobile number.
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Fill out the loan application form with your details like name, date of birth, PIN code, PAN, etc.
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Click on ‘PROCEED’.
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Enter the loan details like the loan amount, credit limit, etc.
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Complete your KYC by submitting the application form.
Process to Apply for Term Loan
Follow these steps to apply for a term loan:
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Visit the website or download the loan app of a reputed lender like Hero FinCorp.
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Fill out the application form with essential details.
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Upload the relevant documents.
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Enter the loan amount and repayment tenure.
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You will receive a reference number for future use if you qualify for the loan.
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A customer representative will call you for more information and formalities.
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After verification, you will receive a loan offer you must accept to get a lump sum disbursal directly into your bank account.
Read Also: Short-Term Business Loan – Meaning, Interest Rate, Pros and Cons
Conclusion
Finalising a loan between a demand and a term loan depends on your financial requirements and repayment capacity. If you need funds for a short period with greater flexibility for repayment, a demand loan would be the better option. However, if you need higher loan amounts for more extended periods, a term loan from Hero FinCorp with competitive interest rates and flexible repayment tenures will be the right option. So carefully evaluate demand loan vs. term loan before finalising your decision.
Frequently Asked Questions
1. What are the examples of demand loan and term loan?
When you avail of an overdraft facility, you get a credit limit within which you can withdraw at any time to cover the urgent expense and repay with interest as and when feasible. On the other hand, when you borrow a Business Loan, you must repay it in monthly instalments comprising both principal and interest components.
2. Which is better, cc or OD?
Cash credit (cc) and overdraft (OD) are similar, but there are differences between the two. Interest rates are lower with cc, and cc is often sanctioned based on inventory and stocks.
3. What are the categories of term loans?
Term loans have three categories: short-term, intermediate-term, and long-term.
4. What are the three types of term loans?
The three types of term loans are short-term, medium-term, and long-term.
5. What is the difference between term loan and normal loan?
Fixed repayment schedules, lower interest rates, and repayment in instalments are some features that make term loans different from normal loans.
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