Demand Loan

Definition: Demand Loan

A Demand Loan—also referred to as a Call Loan—is a loan agreement that allows the lender to demand full repayment of the loan at any time. Unlike installment loans or term loans, the repayment timeline of a demand loan is not fixed, providing lenders with greater flexibility and liquidity control. Borrowers benefit from the immediate access to capital but must be prepared for the sudden repayment requirement.

Examples

Example 1: Business Expansion

A small business owner, Jamie, obtains a $50,000 demand loan from a bank to expand operations by purchasing new equipment. Six months after receiving the funds, the bank calls the loan, requiring Jamie to repay the total principal amount immediately. Jamie needs to find quick liquidity or renegotiate terms quickly.

Example 2: Real Estate Purchase

Abel borrows $10,000 on a demand loan for the down payment on a parcel of land. The bank retains the right to call the loan and if they do, Abel may need to quickly liquidate other assets or potentially sell the land at a disadvantaged price to meet the repayment demand.

Frequently Asked Questions (FAQs)

1. What makes a demand loan different from a term loan?

Unlike a term loan which has a set repayment schedule and duration, a demand loan can be recalled by the lender at any time without warning, requiring immediate repayment in full.

2. What are the benefits and risks associated with demand loans?

Benefits: Immediate access to funds and flexibility in repayment terms. Risks: Potential sudden repayment demand and associated liquidity challenges for the borrower.

3. How does the interest rate on a demand loan typically compare to other loans?

Interest rates on demand loans may be variable and can often be higher than term loans due to the added risk to the borrower from the potential immediate repayment demand.

4. Can demand loans be negotiated for extension or conversion?

Yes, borrowers and lenders can negotiate terms to extend the loan or convert it to a different type of loan with a more structured repayment plan. However, this depends entirely on the lender’s discretion and current market conditions.

5. Are there typical usage scenarios for demand loans?

Demand loans are typically used for short-term financing needs, such as bridging capital gaps, urgent real estate transactions, or sudden business expenses.

Call Loan

A loan which can be demanded by the lender to be paid in full at any time, typically without advance notice.

Term Loan

A loan with a predetermined repayment schedule and term, often with fixed conditions regarding the interest rate and payment intervals.

Line of Credit

A credit facility provided based on a borrower’s creditworthiness, enabling them to draw money as needed up to a specified limit and typically repay over flexible terms.

Liquidity

The ability to quickly convert assets into cash without significant loss of value, important for meeting sudden debt obligations such as those potentially posed by a demand loan.

Online Resources

References

“Principles of Real Estate Practice” by Stephen Mettling and David Cusic
“Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
“The Real Estate Wholesaling Bible” by Than Merrill
“Commercial Real Estate Analysis and Investments” by David M. Geltner and Norman G. Miller

Suggested Books for Further Studies

“Principles of Real Estate Practice” by Stephen Mettling and David Cusic
- A thorough guide covering foundational real estate principles, including various financing options like demand loans.
“Real Estate Finance and Investments” by William Brueggeman and Jeffrey Fisher
- This book provides comprehensive coverage of real estate finance mechanisms and investment strategies, including the risks and benefits of demand loans.
“The Real Estate Wholesaling Bible” by Than Merrill
- This text dives into real estate wholesaling with practical insights on how different loan types, including demand loans, can affect transactions.
“Commercial Real Estate Analysis and Investments” by David M. Geltner and Norman G. Miller
- A deep dive into the analysis and investment strategies pertinent to commercial real estate, including different forms of financing.

Real Estate Basics: Demand Loan Fundamentals Quiz

### Which type of loan allows the lender to demand repayment at any time? - [ ] Term Loan - [ ] Municipal Loan - [x] Demand Loan - [ ] Mortgage Loan > **Explanation:** A demand loan permits the lender to require full repayment at any time, typically without prior notice to the borrower. ### In what scenario might a demand loan be beneficial for a borrower? - [ ] When needing long-term, predictable financing - [x] When requiring immediate, short-term funds - [ ] When purchasing real estate long-term investment - [ ] When refinancing a mortgage > **Explanation:** Demand loans are beneficial in situations where a borrower needs immediate, short-term funds while accepting the risk that the loan may be called at any time. ### What key risk is associated with demand loans? - [ ] High fixed repayment schedule - [ ] Prepayment penalty fees - [x] Sudden repayment requirement - [ ] Collateral foreclosure > **Explanation:** The primary risk of demand loans is that the lender can demand repayment at any moment, requiring the borrower to have quick access to sufficient funds. ### Which feature is NOT typical of a demand loan? - [ ] Immediate availability of funds - [ ] Flexible short-term usage - [ ] Right of lender to call the loan any time - [x] Fixed repayment term > **Explanation:** A fixed repayment term is not typical of demand loans, which instead allow the lender to demand full repayment at any time. ### What often determines the interest rate on a demand loan? - [x] Negotiation and market conditions - [ ] Fixed rate scheduled by loan terms - [ ] Monthly employment status - [ ] Borrower's long-term credit score > **Explanation:** Interest rates on demand loans are often determined by negotiation between the borrower and lender and prevailing market conditions. ### What could a borrower negotiate if a demand loan is called? - [ ] Higher interest - [x] Loan extension or conversion - [ ] Property as collateral - [ ] Reduced principal amount > **Explanation:** Borrowers may negotiate with lenders for extensions or conversion into a different type of structured loan if the demand loan is called. ### Why might a lender prefer issuing a demand loan? - [ ] Guaranteed profit - [ ] Risk-free - [x] Greater liquidity and minimizes risk - [ ] Decreased administrative costs > **Explanation:** Lenders prefer demand loans as they offer greater liquidity and flexibility, allowing the financial institution to minimize risk associated with long-term commitments. ### How could a borrower mitigate the risk posed by a demand loan? - [x] Maintain high liquidity - [ ] Increase fixed asset investments - [ ] Finance through long-term mortgages - [ ] Depend solely on business revenue > **Explanation:** To mitigate the risk posed by a demand loan, a borrower should maintain high liquidity to meet potential sudden repayment requirements. ### What kind of transactions are demand loans less suitable for? - [ ] Short-term cash needs - [ ] Emergency business expenses - [ ] Real estate down payments - [x] Long-term, stable investments > **Explanation:** Demand loans are less suitable for long-term, stable investments due to the risk of sudden repayment demands interrupting planned financial strategies. ### Which key aspect enhances a borrower's usage scenario of a demand loan? - [ ] Fixed interest rates - [ ] Long repayment terms - [x] Flexibility of immediate funds access - [ ] Involvement in personal expenses > **Explanation:** Immediate access to funds and flexible usage terms enhance the suitability of demand loans for borrowers needing quick financial solutions.