Key Takeaways

  • A demand note is a type of promissory note that allows the lender to call for repayment at any time, usually with short notice.
  • Unlike standard promissory notes, demand notes rarely have fixed repayment schedules and are highly flexible but riskier for borrowers.
  • Promissory notes can be structured as lump sum, interest-only, or installment payments, while demand notes focus on immediate repayment rights.
  • Demand notes are often used in informal settings like personal loans, family lending, or short-term financing for businesses.
  • They typically carry higher risk for borrowers but may offer lower interest rates or informal terms.
  • Lenders benefit from liquidity and control, but enforceability can be limited if the terms are vague or not properly documented.

Demand note vs promissory note are both ways to provide a written agreement from a lender to a borrower. A demand note means that the balance owed does not have to be repaid until it is 'demanded' by the lender and the note does not have a specific end date listed. When payment is requested, a time period will be given for repayment. A promissory note, in contrast, can have the option for payment to be 'on demand' or at a specified date. A demand note is not required to show cause notice to be given to a borrower who is delinquent, unlike a mortgage loan.

Promissory Note Details

A promissory note is repaid in full at the end of the term listed on the note. There are four methods of repayment including:

  • Lump sum payment- This means the entire note is paid in one payment at the end of the term.
  • Interest only- Meaning the regular payments are applied to only the interest that is being accrued, not on the principal amount.
  • Interest and Principal repayment- Funds are being applied to both the interest being accrued and the principal amount of the note.

The option for the borrower to repay the remaining principal without penalty is possible if the lender approves. The lender may not approve this option if the note is seen as an investment. In this case, they can impose a penalty to avoid losing income when they reinvest the money.

The lender can also request a form of collateral as an insurance policy if the borrower defaults on the note. This will require legal action but will help the lender recoup any lost funds. The collateral does not have to match the amount of the note; it can be any amount. If the collateral amount is less than the note and the borrower defaults, the lender may seize the collateral, then sue for the rest of the amount. Inversely, if the collateral is more than the note, the excess amount received from the sale of the collateral must be returned to the borrower.

In some cases, promissory notes can be resold at a discounted rate, including corporate bonds and retail investment loans. The new owner of the note can receive the total face-value amount on the date of maturity or a smaller amount if it is before the due date. The new owner of the note will frequently receive interest, along with the appreciated difference in the price.

A promissory note may also contain additional terms such as late penalty charges, attorney fee provisions, and other note specific requirements.

What Is a Demand Note?

A demand note is a written agreement where the borrower promises to repay the lender upon request rather than on a fixed schedule. Unlike traditional promissory notes that include a clear repayment timeline, demand notes remain payable whenever the lender issues notice—often within a short period such as 30, 60, or 90 days.

Key features of demand notes include:

  • Flexibility for the lender: The lender can call the debt at any time.
  • Uncertainty for the borrower: The borrower cannot predict exactly when repayment will be required.
  • Notice period: While repayment is due “on demand,” many demand notes specify a short grace period for repayment after the demand is made.
  • Use in informal loans: Demand notes are often used between family, friends, or in temporary financing arrangements

Because of their flexibility, demand notes are less common in large commercial settings but can be useful in short-term lending when parties value simplicity over structure.

Signing Details

The date of when the promissory note is signed does not have to be filled in right away. A blank line can be put in the contract and the date can be entered after the printing of the document. A notary public or witness is also, in general, not required when signing the promissory note. For some jurisdictions, this is not the case and a notary public of witness must be present when the promissory note is signed.

Whether it is required or not, a witness to the signing is recommended to help if there are issues with the borrower repaying the note. At the very least, the borrower signing should be witnessed. If you want to cover yourself in case of legal issues later, have a notary public witness both the lender and borrower signing the note, then have them notarize the signatures.

Advantages and Disadvantages of Demand Notes

Advantages for lenders:

  • Immediate access to funds if liquidity is needed.
  • Reduced risk of long-term borrower default since repayment can be demanded quickly.
  • Flexibility to adjust to changing financial circumstances.

Advantages for borrowers:

  • Often easier to obtain than structured loans.
  • May involve lower or no interest if the arrangement is informal.
  • Useful for short-term or emergency financing.

Disadvantages for lenders:

  • Risk of strained relationships, especially in personal lending.
  • May be harder to enforce in court without clear terms.

Disadvantages for borrowers:

  • Lack of predictability in repayment obligations.
  • Potential strain on personal or business finances if repayment is suddenly demanded.

Demand and Time Instruments

A promissory note is how a borrower shows their intent to repay the note. All rules associated with promissory notes are from the Uniform Commercial Code Article 3 (Article 3). This stipulates the notes can act as instruments of demand or time.

  • A demand instrument holder determines when they should expect payment. This timeframe must include a timeframe or date for repayment to take place.
  • A time instrument has the option to use an acceleration clause that allows the holder to move the payment date forward.

If either a demand or time instrument is used, it may be an indication that the borrower's credit rating has dropped.

Legal Enforceability and Practical Use

While demand notes are legally recognized under the Uniform Commercial Code (UCC), their enforceability depends heavily on how they are drafted. Courts may require evidence that the borrower agreed to repay on demand and that reasonable notice was provided.

Demand notes are commonly used in:

  • Small business financing: Providing working capital until longer-term funding is secured.
  • Bridge loans: Short-term loans that fill a funding gap.
  • Family or personal loans: When parties trust each other and prefer simplicity.

Borrowers should ensure they fully understand the risks before signing, while lenders should clearly document terms such as interest, repayment notice period, and default remedies to avoid disputes.

Frequently Asked Questions

  1. What is the main difference between a demand note and a promissory note?
    A demand note allows repayment to be required at any time by the lender, while a promissory note usually specifies a repayment schedule or maturity date.
  2. Are demand notes legally enforceable?
    Yes, demand notes are enforceable if properly documented, but vague or informal agreements may be more difficult to uphold in court.
  3. Do demand notes charge interest?
    They can, but not always. Some informal demand notes between family or friends may carry no interest, while business-related notes often include it.
  4. When are demand notes most commonly used?
    They are often used for personal loans, emergency financing, short-term business needs, or bridge loans.
  5. What risks do borrowers face with demand notes?
    The primary risk is unpredictability—repayment may be demanded at any time, which can strain cash flow or finances unexpectedly.

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