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 common among family, friends and close business associates. However, banks can engage in demand loans for long-standing customers who have sound credit profiles.

BREAKING DOWN 'Demand Note'

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 unsecured, typically 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 he or she 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 are laid out in a written demand loan agreement, which is not enforceable under law, but serves as a type of moral contract between the parties. Numerous free templates of demand loan agreements are accessible online.

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 written loan agreement in this case, unlike a friend-to-friend loan, is subject to legal enforcement.

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