Know the difference between demand loan & term loan. Compare the loan types and understand the difference to know which loan suits you the best. Read on! A loan is an amount of money availed by a borrower from a lender, which is repaid back with a sum of extra money known as interest. There are many types of loans available, such as personal loans, business loans, home loans, and so on. They can all have varying types of terms and conditions, depending on the lender and type of loan. Some of these variants include two types of loans known as demand loan and term loan. There can be slight confusion as to what is demand loan vs term loan. We’ll explain the differences below.
Demand Loan And Term LoanSnneha Lukka october 5, 2019
Demand Loan vs Term Loan Difference
Demand loan is a loan which can be anytime be demanded by a bank or lender, whereas term loan refers to loans that have a fixed repayment tenure and must be repaid by the maturity date according to a fixed repayment schedule. Some examples of term loan include home loan, education loan, vehicle loan and so on. Examples of demand loan include overdraft facility and fixed deposit loan.
With a demand loan, the borrower must repay it within a very short duration (between 1 to 7 days) as per the policy set by the lender. Term loan, on the other hand, can range from 1 to 20 years. Therefore, term loan is a loan repaid over a longer tenure and is availed by borrowers who can only repay the loan over a long-term tenure; demand loans are availed by borrowers who require urgent funds and can repay it back within a short period of time.
The rate of interest on term loans is levied on the entire loan amount sanctioned, whereas interest on demand loans is only levied on the amount utilized by the borrower, and not on the entire amount. Let’s suppose that an individual borrows an amount of Rs. 10,000 but only utilizes Rs. 5,000 of the amount. In the case of demand loan, the interest will be levied on only Rs. 5,000; whereas with term loans, the interest would be levied on the amount of Rs. 10,000.
When it comes term loans, there is a prepayment penalty which means that the bank or lender will charge a penalty in case you pay off your entire loan before its repayment date. However, there are no prepayment charges with demand loans. There are several key differences between demand loan and term loan, which can be seen above. While deciding between demand loan vs term loan, borrowers need to remember their requirement and repayment capabilities before availing either one of them.