What Are the Different Types of Loans: Term, Demand, and Revolving Loans?

Understanding which loan structure fits your needs makes a big difference in cost, cash-flow planning, and lender relationships. Below I explain how each type works, who typically uses them, real-world examples, pros and cons, eligibility cues, and practical strategies to pick the right product. (This is educational information and not personalized financial advice.)

How each loan type works

  • Term loans

  • A lender advances a fixed principal amount that the borrower repays over a defined schedule (monthly, quarterly, etc.) until maturity. Payments typically include principal and interest (amortizing) but can also be interest-only for a set period, or include a final balloon payment.

  • Common uses: equipment purchases, real-estate acquisition, business expansion, and longer-term projects.

  • Example calculation: a $100,000 five-year term loan at 4.5% APR has a monthly payment near $1,864 (using standard amortization), which helps you budget predictable monthly obligations.

  • Demand (call) loans

  • Also called call loans, these are repayable at the lender’s request. There may be no fixed maturity date, or the lender can require repayment on short notice. They’re commonly used in commercial banking, interbank lending, and some private credit arrangements.

  • Key feature: lender control of timing—borrowers must maintain liquidity or have contingency plans.

  • Revolving loans (lines of credit)

  • The lender sets a maximum credit limit. Borrowers can draw, repay, and redraw up to that limit during the commitment period. Interest is charged only on outstanding balances.

  • Common examples: personal credit cards, home equity lines of credit (HELOCs), and business lines of credit.

  • Credit utilization—the ratio of outstanding balances to limits—affects consumer credit scores and lender behavior (see CFPB guidance on credit scoring) (https://www.consumerfinance.gov/).

Real-world examples and when to pick each

  • Term loan scenario

  • You run a small manufacturing firm and need a CNC machine. A 5–7 year term loan spreads the cost and matches the asset’s useful life. Predictable monthly payments make it easier to model cash flow and amortize the equipment on your books.

  • Tip: match loan term to useful life of the asset whenever possible.

  • Demand loan scenario

  • A supplier relationship or commercial lender offers a demand facility to a seasonal business that needs flexibility but can maintain reserves. This loan can be helpful for short-term working capital, but it requires discipline: if the lender calls the loan, you must repay immediately.

  • Revolving loan scenario

  • A retailer facing seasonal inventory swings uses a revolving business line of credit to buy stock before holiday sales and repays after sales occur. Revolving credit suits recurring, unpredictable cash needs.

In my practice working with small businesses, I’ve seen clients reduce interest costs by replacing multiple high-cost short-term loans with a single revolving line tied to clear covenants, then using a term loan to fund long-term capital expenses.

Pros and cons at a glance

  • Term loans

  • Pros: Predictability, easier budgeting, often lower rates for secured loans, suitable for capital expenses.

  • Cons: Less flexibility; prepayment penalties may apply; fixed amortization can strain cash flow early in the term.

  • Demand loans

  • Pros: Flexibility for lenders and borrowers; can be simple to arrange for well-known counterparties.

  • Cons: Significant liquidity risk for borrowers; not suitable if an abrupt call would jeopardize operations.

  • Revolving loans

  • Pros: Flexible access to funds; interest-only on outstanding balances improves short-term cash flow; good for seasonal or variable needs.

  • Cons: Variable cost if rates are floating; overuse damages credit utilization and credit score; lines can be reduced or canceled by the lender.

Eligibility and underwriting factors

Lenders evaluate different metrics depending on loan type, but key factors include:

  • Credit history and FICO score for consumer loans (CFPB resources explain credit scoring basics) (https://www.consumerfinance.gov/)
  • Business revenue, cash flow, and debt-service coverage ratio for commercial term loans and lines of credit (see SBA guidance) (https://www.sba.gov/)
  • Collateral and guarantees: secured loans often get lower rates; unsecured products rely on creditworthiness alone
  • Relationship and covenant history: demand facilities and lines often reflect the lender’s confidence in ongoing relationship and controls

Cost considerations and how lenders price loans

  • Interest rate basis: fixed vs. floating (e.g., prime or SOFR + spread). Floating-rate products (common for lines and many commercial loans) can increase borrowing cost when benchmark rates rise.
  • Fees: origination fees, commitment fees (for revolvers), unused-line fees, prepayment penalties, and covenants enforcement costs.
  • Effective cost: look beyond nominal APR to include fees and how interest compounds for short-term products. The Consumer Financial Protection Bureau explains how fees and APR differ across consumer credit products (https://www.consumerfinance.gov/).

Practical strategies to choose and manage loans

  1. Match the tool to the need. Use term loans for long-lived purchases and revolving lines for working capital. If both needs exist, a combination often makes sense.
  2. Stress-test liquidity. For demand loans, simulate a lender call and confirm you can cover repayment without closing core operations.
  3. Negotiate covenants and fees. Ask for cap on annual rate increases, limits on commitment fees, and transparency on what triggers collateral calls.
  4. Monitor utilization. For consumer and business revolving credit, keep utilization low to protect credit scores and lender capacity.
  5. Consolidate thoughtfully. Consolidating several small, high-rate short-term loans into a term loan can reduce cost, but watch prepayment penalties and total interest paid over time.

For a deeper comparison tailored to businesses, see our guides “How Business Lines of Credit Differ from Term Loans” and “Choosing a Term Loan vs a Revolving Line for Growing Businesses.”

Common mistakes and red flags

  • Treating all debt as interchangeable. Rolling short-term, high-cost debt into a long-term loan without checking for prepayment fees or covenant impacts can backfire.
  • Ignoring contingent repayment risk. Demand loans and callable facilities must be treated like potential short-term liabilities in your liquidity planning.
  • Overusing revolving credit. High utilization hurts credit scores and increases borrowing costs; it can also trigger covenant breaches for business borrowers.
  • Missing fee traps. Commitment fees, unused-line charges, and origination fees can materially increase effective borrowing costs.

Frequently asked questions

  • Can I convert a revolving line to a term loan? Often yes—lenders will refinance outstanding revolver balances into a term loan, especially when the need becomes long-term. Negotiate rates and fees.

  • Are demand loans common for consumers? Not typically. Demand loans are mostly in commercial banking, brokerage, and interbank markets. Consumer equivalents would be uncommon unless in a private lending arrangement.

  • How does a line of credit affect my credit score? Revolving credit affects credit utilization; keeping balances low relative to limits helps maintain higher scores. For more on credit scoring, refer to CFPB guidance (https://www.consumerfinance.gov/).

Bottom line

Term, demand, and revolving loans are different tools for different problems. Choose a term loan for predictable repayment of long-lived purchases; choose a revolving line for ongoing, variable cash needs; and treat demand loans with caution because they expose you to lender-driven timing risk. In practice, many borrowers combine products: use a revolver for short-term working capital and a term loan for financing fixed assets.

Professional disclaimer: This article is educational and not individualized financial advice. For tailored guidance, consult a qualified financial advisor, lender, or an SBA counselor (https://www.sba.gov/).

Authoritative sources and further reading

(Last reviewed: 2025)