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.
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.