Demand Note
Definition
A demand note is a financial instrument that by its express terms is payable immediately upon the lender’s request or on a specified date of maturity without further demand for payment. It can also refer to an instrument payable at sight or upon presentation, or in which no specific time for payment is stated.
Key Characteristics
- Immediate Payment: The amount owed under the demand note is due as soon as the lender requests payment.
- Flexibility: Unlike term loans with fixed repayment schedules, demand notes offer flexibility regarding the repayment timeframe.
- Interest Accrual: Interest can accumulate over time, making it more costly if the borrower delays repayment.
- No Fixed Term: Often, demand notes do not have a fixed term or maturity date, increasing the lender’s financial security.
Examples
- Short-Term Business Loans: Companies might use demand notes to secure quick financing without long-term obligations.
- Personal Loans from Friends or Family: These informal arrangements may be documented with a demand note to ensure repayment flexibility.
- Broker-Margin Accounts: Demand notes can be used in brokerage accounts to finance stock purchases, payable on demand when the lender requests the funds.
Frequently Asked Questions (FAQs)
What is the primary advantage of a demand note?
The primary advantage is its flexibility in terms of repayment schedules, benefiting borrowers who might face variable cash flows.
Are interest rates higher on demand notes?
Interest rates on demand notes can be higher due to the immediate availability of funds and the flexibility in repayment terms.
What happens if the borrower cannot repay at the demand?
If a borrower cannot repay the amount demanded, the lender may initiate legal proceedings to recover the debt, including taking possession of any collateral, if applicable.
How does a demand note differ from a promissory note?
A demand note is payable immediately upon the lender’s request, whereas a promissory note typically includes a fixed repayment schedule with specific payment dates.
Can a demand note be used for large amounts of money?
Yes, demand notes can be used for any amount, although they are often associated with smaller, short-term loans due to their flexible nature.
Related Terms
Promissory Note
A legal document in which one party promises to pay a specific amount to another party on a defined date or on-demand, distinct from a demand note because of its structured payment schedule.
Callable Loan
A loan where the lender can demand repayment of the principal and any accrued interest at any time, similar to a demand note but usually formalized in a broader loan agreement context.
Revolving Credit
A system where a borrower can draw, repay, and draw again up to a certain limit (e.g., credit cards), in contrast to demand notes which are typically a single lump sum repayable on demand.
Online References
Suggested Books for Further Studies
- “The Banker’s Handbook on Credit and Lending” by Brian Chiefari
- “Commercial Loan Documentation” by Anthony Saunders and Marcia Cornett
- “Fundamentals of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Fundamentals of Demand Notes: Finance Basics Quiz
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