What Is a Demand Loan? A Guide for Canadians

Sometimes, fixed long-term or short-term loans just don’t do the trick. Whether your credit score is lacking or you need money for specific purchases, you have one more option at your disposal – a demand loan. 

And although you might not have heard of this less-popular cousin, it might provide just what you need. 

So what is a demand loan? Care to find out?

Let’s jump in!

What Is a Demand Loan?

A demand loan in Canada is a loan for which the lender can require full repayment at any time. In fact, this is one of the principal conditions for the loan and both the lender and borrower are aware of it from the outset. 

A demand loan agreement benefits both parties in that the lender has the reassurance they need to demand repayment for any reason and at any time, while the borrower has increased flexibility of repaying the loan in full or part before a due date without penalty. This loan is secured and requires collateral from the borrower. 

Even though demand loans don’t have the same stringent requirements as long-term loans, they are not for everyone. For some, it might even be more difficult to secure an on demand loan, especially if they don’t have a long-standing relationship with the lending institution. But of course, conditions vary across lenders, and demand loans are open to:

• Landowners
• Homeowners
• Shareholders
• Entrepreneurs
• Small business owners
• Venture capitalists

How Do Demand Loans Work?

This loan is also called a “call loan” or a Working Capital Demand Loan (WCDL). It allows you to borrow a sum of money from a lending institution in Canada and repay it gradually through installments. But if the lender asks for the whole or a big chunk of the sum back at any point, you must repay it at once. 

Like other loans, demand loans also have tenures. Usually, these range from a few days to a maximum of a year. Therefore, they qualify as a short-term loan with additional stipulations. Borrowers can use various things as collateral, such as vehicles, land, buildings, or fixed deposits to secure the loan.  

These loans afford flexibility to the lender and the borrower alike. Namely, the borrower can also settle the loan at any time, as there is no fixed maturity nor a predetermined repayment schedule. 

The demand loan interest rate is what’s called a “floating interest rate”, which means it changes periodically and reflects the economic or financial market (like prime + 2%). Usually, it’s higher than the prime lending rate banks charge and abides by the repayment terms specified in the contract. 

Let’s look at an example:

John is a small-town farmer, looking to set up a dairy farm. The upfront costs prove too much for his wallet and he decides to take out a loan. But with his poor credit score, the bank wouldn’t offer him a working capital loan or any other long-term loan. 

So, John decides to provide his insurance papers as collateral and the bank grants him a demand loan to fund his business activity. Now, he’s taken a loan against the collateral he put up and receives the funds needed to operate the dairy. The bank is also satisfied because it can request repayment anytime and receive the interest on the money lent. 

What Can You Use a Demand Loan For?

Demand loans are suitable for any individual who wants to meet immediate personal needs like education, investing, renting, etc., and businesses who want to meet short-term or working capital needs like paying salaries, purchasing inventory, or investing in new projects. 

Since an on demand loan works similarly to regular term loans, you’ll need to build a solid relationship with your chosen lender before they approve you as a borrower. Usually, this is because the funds you receive are meant to cover more significant expenses and not just a regular home renovation.  

Although there are differences between a demand loan vs a term loan other than the manner of repayment, demand loans can also be used for other purposes, including but not limited to:

• Investments 
• Short-term business funding 
• Partnerships
• Bridge financing 
• Temporary working capital
• Small asset purchases (farm animals, cars, used equipment)
• Repaying short-term liabilities
• Renting or leasing properties (offices, farms)

When to Take Out a Demand Loan?

Taking out a demand loan in Canada should include rigorous planning. Since the lender can recall your loan at any time, you have to ensure you’re able to take on the financial burden. If not, you’ll end up defaulting on your payments and that won’t look good on your report. 

So, before you settle on demand loans, take a look at your finances and make sure you have a healthy credit history. Additionally, it might help if you have a longstanding rapport with the lending institution of your choice and plan on how you’ll use your loan. 

Keep in mind that you shouldn’t be taking out loans for every odd expense. Determine whether the purpose is worthwhile and ask if the lender can help. 

But you should only take out a loan if you’re financially prepared to repay it in full if the lender asks. 

You might be thinking – If I’m financially prepared to cover the entire cost, I wouldn’t get a loan in the first place – but we beg to differ! 

An on demand loan will still grant you the flexibility you wouldn’t otherwise get to repay the money bit by bit. Plus, the lender might never ask to recall the loan before you pay it back, so you could be one of the lucky ones. 

Advantages of Demand Loans

It’s not hard to see that you can fish out numerous advantages of a demand loan agreement right off the bat, so let’s mention the benefits associated: 

• No set repayment schedule 
• No prepayment penalties
• Borrow as much as you want
• Borrow whenever you want
• Floating interest rates
• Interest applies to the money used and not the full loan amount
• Use of stocks, land, buildings, or other assets as collateral
• Collateral facilitates approval and more favourable terms
• Short repayment terms 
• Faster debt repayment 

Even with these favourable terms, we implore you to do your own thorough research, take a serious look at your finances and determine whether you realistically have the capacity to handle such a significant obligation. 

Conclusion 

Depending on your needs as an individual or a business owner, demand loans can be a saving grace. But when used recklessly, they can also cause a chink in your armor.  

Hopefully, our guide on the demand loan in Canada has effectively helped you realize that you might be missing out on something great in financing. 

If not, it’s certainly facilitated your understanding of loans. And when is learning not an asset?