Demand Note Definition
What Is a Demand Note?
A demand note is a loan with no fixed term or repayment schedule. It can be recalled upon the lender’s request, assuming the notice required by the provisions of the loan are met. Given its relative informality, a demand loan (or note) is most common among family, friends, and close business associates. However, banks can also issue demand notes to long-standing customers who have sound credit profiles.
Key Takeaways
- A demand note is an informal loan without a fixed term or repayment schedule, that can be called in (demanded) at any point given requisite notice to the borrower.
- Due to their flexible nature, demand notes are common in informal lending between family and friends and often involve relatively small sums.
- While not common, banks may also issue a demand note to certain customers with good relationships and a history of creditworthiness.
Demand Notes Explained
A demand loan can be made to a family member, friend or business associate as a favor to that person who wishes to have some sort of financing without being bound by formalities and legal implications. The loan is unsecuredtypically modest in size, does not have a fixed maturity date, and is not subject to a principal and interest repayment schedule. The borrower enjoys these benefits, but they also must be prepared to return the loan “on demand” by the lender. In other words, for these flexible terms the lender retains the right to call in the loan at any time just as long as the advance notification is reasonable.
The broad terms of a demand note are laid out in a written demand loan agreement, which is not always enforceable under law, but serves as a type of moral contract between the parties. Importantly, these terms include principal amount to be repaid, interest rate, and the period of notice that a lender must notify a borrower that the note is due. Numerous free templates for demand loan agreements are available online.
Bank-Issued Demand Notes
Though not very common, when a bank provides demand loans it is invariably with customers that have had a good relationship with the bank. The bank feels comfortable lending on terms that are favorable to the borrower because the repayment history of customer indicates that it has strong creditworthiness. The borrower benefits from the flexible terms and the bank benefits from a strengthening of the banking relationship. The official written loan agreement in this case, unlike a friend-to-friend loan, is subject to legal enforcement of its terms and will require the borrower’s signature.