Choosing the right loan isn’t just about interest rates; it’s about how and when you will be expected to repay the loan amount. For instance, demand loans give you complete flexibility in repayment but come with uncertainty. However, there are other credit options like term loans that offer stability in repayment but lock you into a fixed schedule.  

Therefore, it is important to know the difference between demand loan and term loan to help make an informed decision about choosing the right financial option. Read on to know more about these two products, how they work. Firstly, you need to compare demand loan vs term loan to understand which product is better suited to fulfil your financial needs.  

It is a short-term flexible loan where the lender can demand full repayment at any time without prior notice. No fixed tenure. No predetermined repayment schedule. 

The borrower pays interest regularly (usually monthly). Principal repayment happens when the lender "calls" the loan or when the borrower chooses to repay. 

Key features: 

• No fixed maturity date. 
• Lender has right to recall anytime. 
• Interest charged on outstanding balance. 
• Usually secured against collateral (FDs, shares, property). 
• Flexible repayment from borrower's side. 

You pledge collateral worth ₹10 Lakh. The bank sanctions a demand loan of ₹7 Lakh (70% of the collateral value).  

The money is credited to your account, and the lender starts charging interest on the loan from day one. 

You are only required to pay the interest on the loan. Say 12% p.a. on ₹7 Lakh = ₹7,000 monthly interest. 

In this loan, the principal amount will stay outstanding until you decide to repay the loan amount (partially or fully).  

Once the bank demands repayment of the loan within a particular timeline, you must comply with their demand or face collateral liquidation. Consequently, the borrower can also repay the loan voluntarily at any time without facing penalties. 

Against fixed deposits: Very common. Bank gives 90% of FD value as loan. Interest rate usually 1-2% above FD rate. 

Against securities: Stocks, mutual funds, bonds pledged. Loan amount depends on security type and volatility. 

Short-term business needs: Bridge financing when exact repayment date is uncertain. 

Personal emergencies: When you need funds but don't want to break FD earning good interest. 

Demand loans work best for short-term, when you have to service an urgent financial need and when the collateral you are pledging can be liquidated easily. 

It is a loan that is repaid within a fixed tenure with a predetermined repayment schedule and structured EMIs.  

Key features of a term loan: 

• Fixed loan tenure (months or years). 
• Predetermined EMI schedule. 
• Interest rate locked at sanction (fixed) or linked to benchmark (floating). 
• Can be secured or unsecured. 
• No lender recalls before tenure ends (except on default). 

Finnable’s personal loan is a common example of unsecured term loan. 

Let’s get an example to understand how term loans work. Suppose you applied for a ₹10 lakh term loan. The bank approves the loan with a repayment tenure of 60 months and interest rate of 11% p.a. With an EMI of ₹21,742 per month, the total repayment for the loan comes up to ₹13,04,520, including both the principal and interest component. 

You can make use of Finnable’s EMI calculator to see the exact monthly payment for your scenario. 

Home purchase: Tenure of 15 - 30 years.  

Vehicle financing: 3 - 7 year car loans. 

Business expansion: Equipment purchase, facility upgrade, capacity addition. 

Education: Student loans with long tenure and moratorium periods. 

Personal needs: Weddings, medical expenses, home renovation. 

Term loans suit long-term, planned expenses where repayment capacity is predictable. 

Repayment Terms and Flexibility 

Demand loans offer flexibility to borrower. Term loans offer predictability. 

Interest Rate Structures 

Demand loans typically carry floating rates linked to bank's base rate. Rates adjust periodically. 

Term loans can be fixed or floating. Fixed means same rate throughout tenure. Floating means rate changes with market conditions. 

Demand loan rates often run 1-2% lower than term loan rates because collateral backing reduces lender risk. 

Loan Tenure and Maturity 

Demand loan: No fixed tenure. It is technically on demand from day one. Practical tenure depends on borrower's repayment and lender's patience. 

Term loan: Fixed tenure. 12 months to 30 years depending on loan type. Maturity date known from start. 

This difference between demand loan and term loan is fundamental. One is open-ended. Other is time-bound. 

Purpose and Suitability 

Demand loans work for: 

• Short-term cash needs with uncertain duration. 
• When you have collateral but don't want to liquidate it. 
• Bridge financing while waiting for expected inflows. 

Term loans work for: 

• Long-term investments with known payback period. 
• Asset purchases (house, car, equipment). 
• When predictable EMIs help budgeting. 

Risk and Default Implications 

Demand loan risk: Lender can recall anytime. If you can't repay on demand, collateral gets liquidated. Market crash reducing collateral value leads to margin calls. 

Term loan risk: Default happens only if you miss EMIs. Lender can't suddenly demand full repayment (unless default). More stable for borrower. 

From borrower perspective, term loans carry lower uncertainty risk. 

Benefits of Demand Loans 

Lower interest rates. Collateral backing means reduced lender risk. 

Flexible repayment. Pay when you have surplus. No mandatory principal schedule. 

Quick disbursement. Often same day for loans against FD or securities. 

No prepayment penalty. Repay anytime without charges. 

Limitations of Demand Loans 

Recall risk. Bank can demand repayment without warning. 

Collateral required. No unsecured demand loans typically. 

Margin maintenance. If collateral value drops, you must provide more collateral or repay part of loan. 

Interest-only structure: Repayments may not immediately reduce the principal. 

Benefits of Term Loans 

Predictable payments. Same EMI every month. Easy budgeting. 

No recall risk. Lender can't demand early repayment. 

Unsecured options available. Personal loans don't need collateral. 

Forced discipline. EMI structure ensures loan gets repaid. 

Limitations of Term Loans 

Higher interest rates. Unsecured term loans cost more than secured demand loans. 

Rigid schedule. Must pay EMI even in the times of temporary financial strain 

Prepayment charges. Some lenders penalise early closure. 

Longer approval process. More documentation and verification than demand loans. 

When you are comparing demand loan vs term loan to decide which option would be more suitable for you, then you should consider the following factors: 

Factors to Consider When Comparing Demand loan vs Term Loan 

• Collateral: If you have a collateral, you can opt for a demand loan or term loan. However, without collateral, a term loan is your only option. 
• Repayment period: If you require the money for short-term borrowing, you can opt for a demand loan. But if you are looking for a longer repayment period, term loan is a more suitable option. 
• Sudden repayment: If the demand for sudden repayment from the bank would create a crisis, you should avoid demand loans. 
• Purpose: In case you are looking to purchase an asset, term loan would be a better option. 

Credit score matters for both. You can check your credit score from Finnable before applying for the loan. What constitutes a good CIBIL score is 750+ for best terms on either loan type. 

Situations Suiting Demand Loans 

Example 1: Suppose you have a ₹20 lakh FD maturing in 8 months and you need ₹15 Lakh now for a business opportunity. You can take a demand loan against your FD and repay the loan amount when the FD matures.  

Example 2: You have a stock portfolio worth ₹50 Lakh. Out of that you need around ₹20 Lakh for 3-4 months. In such a scenario, you can opt for a demand loan against shares and repay the loan within the required time.  

Situations Suiting Term Loans 

Example 1: You are looking to purchase a house. In such cases, you can opt for a term loan with structured repayment options and fixed EMIs to plan your budget adequately. 

Example 2: If you are looking to purchase equipment for your business, you can opt for a term loan.  As your machine will help your generate revenue over the next few years, it will give you a better chance to repay the loan within the predetermined tenure. 

Whether you choose a demand loan or a term loan depends on flexibility vs predictability. 

Choose demand loan when you have collateral, need short-term funds, and can handle the recall risk. Choose term loan when you want structured repayment, long-term financing, and predictable repayment timelines. 

Most people encounter term loans more often. But understanding both helps you pick the right tool for each financial situation.