A demand loan agreement is a credit arrangement between a lender and a borrower that allows the borrower to access funds as needed. It`s called a demand loan because the lender can demand repayment at any time, without warning. This type of loan is also known as a revolving credit facility or a line of credit.
Demand loan agreements are commonly used in business settings, where companies may need to access funds quickly to cover expenses or pay bills. With a demand loan, the borrower has a pre-approved credit limit and can draw down on the loan as needed, up to that limit. Interest is only charged on the amount borrowed, not on the entire credit limit.
One of the benefits of a demand loan is that it provides flexibility to the borrower. They can access funds when they need them, without having to go through the process of applying for a new loan each time. Additionally, they only pay interest on the amount borrowed, which can save money compared to a traditional loan with a fixed interest rate.
However, demand loans can also be risky for borrowers. Because the lender can demand repayment at any time, the borrower needs to have the ability to pay back the loan quickly. Otherwise, they risk defaulting on the loan and facing any fees and penalties that come with it.
As with any loan agreement, it`s important for borrowers to read and understand the terms and conditions of a demand loan agreement before signing it. They should pay particular attention to any fees, interest rates, and repayment terms. They should also have a plan in place for paying back the loan, should the lender demand repayment.
In summary, a demand loan agreement is a credit arrangement that allows borrowers to access funds as needed, up to a pre-approved credit limit. While it provides flexibility, borrowers should be aware of the risks involved and ensure they have a plan for repayment.