Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Updated November 30, 2020 Reviewed by Reviewed by Khadija KhartitKhadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
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 most common among family, friends, and close business associates. However, banks can also issue demand notes to long-standing customers who have sound credit profiles.
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 they 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 of a demand note are laid out in a written demand loan agreement, which is not always enforceable under law, but serves as a type of moral contract between the parties. Importantly, these terms include principal amount to be repaid, interest rate, and the period of notice that a lender must notify a borrower that the note is due. Numerous free templates for demand loan agreements are available online.
Though not very common, 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 official written loan agreement in this case, unlike a friend-to-friend loan, is subject to legal enforcement of its terms and will require the borrower's signature.