Demand loan
| Demand loan |
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| See also |
A demand loan differs from traditional loan by the fact that it must be paid on demand to lender, who can require full repaid in any time or at the time specified by the lender. This condition is understood by the lender and the borrower from the beginning of the loan conclusion. Such type of loan is the best option for small or large businesses, which needs loans for short period [1].
Very important is relationship between the lender and the borrower. It has an impact on the timing, amount and characteristic of the loan. Moreover, often this relationship decides about type of the loan - demand loan or term loan. If parties can trust each other, they usually choose demand loan. The calculation have to be made monthly, but tax law allows taxpayers to use a blended annual rate in case of the demand loan, which has a fixed capital which remains in trading throughout the year [2]
Demand loan granted by a trusted person
The lender should trust the borrower of demand loan, because this type of loan is not related to formalities and legal consequences. It can be provided, for example, to a family member, friend or business partner. The loan is unsecured, usually for small amount of money, has no fixed maturity and is not subject to a repayment schedule of principal and interest. The borrower does not have to worry about the very rigid conditions for receiving the loan, but he must also be prepared to return the loan to the lender at any given moment. The general terms are set out in a written demand loan agreement. It is very important to remember about the fact that such agreement is not enforceable by law, but serves as a type of moral agreement between the borrower and the lender.
Demand loan granted by the bank
In the case when the bank gives demand loans, the customer's previous relationship with the bank is very important. If the customer's repayment history indicates his high creditworthiness, then the bank presents very favorable conditions for the borrower. This solution is perfect for both parties, because the borrower uses flexible terms and the bank uses the strengthening of the banking relationships. A written loan agreement in this case is subject to legal enforcementin.
Split-dollar demand loan
Due to minimize or even eliminate tax liability associated with purchasing, many professionals recommend split-dollar agreements. There are three types of split-dollar loans:
- demand loans
- term loans
- hybrid loans.
Under a split-dollar demand loan, the employer must pay compensation to the employee in the amount of interest lost and the employee must repay that amount as interest paid on the loan [3]. Such operation have to occur on the last day of calendar year to which they are attributable. The split-dollar demand loan is the most popular type of loan, because both parties of the contract have the right to cancel it at any time after 30 days. In the context of a private split-dollar loan, the best option is exclude the one-sided termination service for the lender. This opportunity should be implemented in life when the note held by the lender may be at a later date.
Footnotes
References
- Eshun A. (2013), How To Start Your Business with or without money, Trafford Publishing, s. 90
- Husbands J.E.(2007,) Two Interesting Alternatives for the Funding of Life Insurance Premiums: Split Dollar Arrangements and Third Party Financing, Estate and Personal Financial Planning, s.10
- Kenot W. (2018), Demand Note
- Vahoose D., Duca J. (1990), Loan Commitments and Optimal Monetary Policy, Ohio State University Press
- Webster J.M.(2019), Split-dollar life insurance: collater assigment method, HMS Insurance Associates Inc.
Author: Weronika Wielochowska
