The Indian lending market grew by 11% in FY22, showing that the average Indian today does not shy away from using debt. In fact, more shoppers, than ever, are now using credit to fund their big purchases. Of the many credit instruments you can avail today, demand loans are an unconventional but useful method of financing. 

Since it is a secured loan, it lets you access ready funds even if you have a low credit score. Moreover, using a demand loan helps balance your credit portfolio when you have other ongoing unsecured loans and need a quick cash influx.

Read on to know more about demand loans and how you can use them.

What Makes a Demand Loan Different from a Regular Term Loan?
Applying for a loan need not be a complex process. Here’s a few key differences to help you avoid confusion between demand loans and regular term loans:

 

Parameter Demand Loans Term Loans
Definition Short-term loan that you have to pay back on the lender’s demand Long-term loan with a set tenure and clear repayment structure
Uses Short-term needs such as for working capital needs and buying raw materials  Large capital expenses such as buying equipment and business expansion
Duration 7 days to a few months Up to 30 years
Mode of repayment You need to pay at the lender’s discretion Predetermined EMIs
Processing and disbursal time Minimal documentation, fast disbursal, and it can help meet short term needs Loan sanction requires more documentation and more time
Interest  Charged only on the amount you utilise Charged on the entire loan amount sanctioned by the lender
Collateral  Required as it is a secured loan Usually not required 
Prepayment penalty No foreclosure charges  Predetermined foreclosure charges 
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When Should You Consider a Demand Loan?

Sometimes, there may be a mismatch between when you need money and when you have it. At such times, you can use demand loans to meet any short-term financing needs. You can get a demand loan to solve your cash crunch, even with a poor CIBIL score, since you will pledge an asset as collateral. 

While both individuals and businesses can avail it, demand loans are generally used by businesses to address temporary working capital needs. 

How to Access a Demand Loan?
Even though it is a secured loan, lenders will offer you a demand loan only if you are a trusted customer capable of handling credit. Hence, you need to have a stable credit history to be eligible. Also, to further ensure you don’t default, lenders insist on promissory notes for demand loans.

 

A promissory note binds you to pay the lender a specified sum of money on a specified date or on demand.

What are the Different Ways to Utilise Demand Loans?

You can use demand loans to address both personal and business needs such as:

  • Purchasing a car, farm animals or land
  • Paying medical bills
  • Paying employee salaries
  • Paying rent
  • Buying raw materials
  • Initial funding for startups
  • Short-term financing for new or existing businesses

Here’s an example to help you understand further:

You have an ongoing personal loan and an educational loan. Due to certain circumstances, you urgently need money to pay a medical bill and have maxed out your credit card limit. Since these are all unsecured loans, you can now use a demand loan by pledging a fixed deposit or asset as collateral. 

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This way, you can swiftly pay your medical bills while also balancing your credit portfolio.

Benefits of a Demand Loan
While you can enjoy many perks while using demand loans, the unique benefits of utilising this form of credit are:

  • Quick capital for short-term needs
  • Interest payable on only the amount availed
  • No prepayment charges
  • No need to worry about EMIs

If you are an MSME owner and don’t want to rely on demand loans to meet your short-term financing needs, you can consider applying for a MUDRA loan.

What is a MUDRA Loan?
MUDRA stands for Micro-Units Development and Refinance Agency, and the loan is offered under the Pradhan Mantri Mudra Yojana (PMMY).

If you are engaged in income generating small business activities in the manufacturing, service and trading sectors, you are eligible to avail a MUDRA loan between ₹50,000 – ₹10,00,000. If you are between the ages of 18 and 65, and have not defaulted on any previous loan payments, you can get a MUDRA loan without having to pledge any collateral.

Types of MUDRA loans
Based on the loan amounts you can classify MUDRA loans into three categories, which are as follows:

  • Shishu Scheme: Up to ₹50,000
  • Kishor Scheme: ₹50,001 – ₹5,00,000
  • Tarun Scheme: ₹5,00,001 – ₹10,00,000

Who Can Benefit from a MUDRA Loan?
A MUDRA loan is meant for activities such as the manufacture of plastic toys and ceramics, trading of products like coir and service activities such as photocopying. You can benefit from a MUDRA loan if you are from these sectors and fall into any of these categories:

  • Individuals, self-employed professionals, business owners, startups, and business entities such as sole proprietorships, partnerships, LLPs and others
  • Micro, small, and medium enterprises (MSMEs)
  • Shopkeepers, retailers, traders, small manufacturers, and artisans
  • Woman entrepreneurs – You can avail a MUDRA loan at concessional interest rates 
  • Minority and backward categories – You can avail MUDRA loans at special interest rates, based on the lender
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Hence, MUDRA loans are useful credit tools targeted toward the growth of non-farm and non-corporate sectors in the country. As these loans don’t require collateral, you can avail these without stress and focus on upscaling your business.

Whether you are the owner of a transportation company, an up-and-coming textile artisan, or more, these loans can help. Demand loans, term loans, personal loans and MUDRA loans are merely few examples of the many types of credit solutions available to you. They each have their unique features and are intended to cater to your nuanced financial needs. This is why it is important to research the market thoroughly before applying and picking the option that is best for you.

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