Category: 

What Is a Demand Note?

Article Details
  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 20 June 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
Doorknobs made of brass automatically disinfect themselves in less than 8 hours.  more...

July 24 ,  1979 :  Serial killer Ted Bundy was found guilty of first-degree murder of two female college students.  more...

A demand note is a loan which is repayable upon the demand of the lender. Such notes can provide flexibility as long as borrowers are prepared to meet the debt obligation on short notice. If a lender does not have this ability, a demand note can be a poor choice for a loan because the borrower can end up in serious trouble.

Also known as a call loan or demand loan, when a demand note is originated, there are no set terms of repayment and the note does not have a due date. At any time, the lender can demand payment, usually with very short notice for the borrower. Unlike loans with a set term, in which lenders must move through a series of steps to recover debt if borrowers become delinquent, a borrower is considered delinquent on the note as soon as she or he fails to pay on demand and the lender can take appropriate action.

Demand notes may be used for short or long term loans. The interest rate is determined at the time the loan is originated and it may be variable, which means that the lender can adjust it periodically. Agreeing to a variable interest rate loan can be a bad decision for a borrower unless the interest rate is capped to ensure that it cannot rise above a certain amount.

Ad

Borrowers can opt to repay a demand note before it is due. The repayment strategy for the loan depends on its nature. For example, if someone has a demand note with low interest, it may make more sense to deposit money into a high interest account which will earn money while also ensuring that funds will be available to repay the note if the lender calls in the loan. On the other hand, if the interest rate is high, borrowers would do well to pay the loan down quickly so that they do not accrue high rates of interest.

As with other types of debt obligations, a lender can choose to sell or transfer a demand note without notifying the buyer until after the transaction is complete. Once the transfer is finished, the new holder of the note can demand immediate payment, or may opt to sit on the demand note and wait for repayment. If the terms of the loan allow for adjustments to the interest rate, the new lender can also raise the interest if it feels so inclined.

Ad

Discuss this Article

clintflint
Post 4

@Ana1234 - Well, I think there is a time and a place for demand notes. If the interest is quite low, it's not a bad idea for someone who has a high interest investment (as long as they have some other way of paying off the demand note if something goes wrong with the investment).

It's the same as any other loan, really. You have to protect yourself and go in with your eyes clear.

KoiwiGal
Post 3

@anon106859 - It depends on the terms of the contract, but I think most likely you would start accruing interest right away. There wouldn't be much point (unless you were completely unethical) in making the loan if it required someone to default before you made any profit.

Most of the time loans that don't have interest for a period of time have some other way of making money (like stores often offer credit cards with interest free terms because they benefit from people buying their stuff). Unless your promissory note is from a friend, I think most of them will start accruing interest right away.

Ana1234
Post 2

I would be extremely cautious about getting a demand note, unless you know exactly what the money is for and when you'll be able to get it back (and you'll be able to get it back very quickly).

I don't know that I would ever actually get a demand note, in fact. It's just too easy to default on them, and, let's face it, it's actually in the best interest of the lender for you to default, because the terms usually specify that you have to pay even more in compensation if you do.

There just doesn't seem to be anything that would be worth getting a demand note for, instead of a normal loan, with terms that were fair to everyone.

anon106859
Post 1

when does interest start to accrue (no prepayment penalty)? At demand?

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email