In this guide
What Is a Demand Note?
A demand note is a promissory note that does not have a fixed repayment schedule. Instead, the lender can 'call' the loan due at any time, and the borrower must repay the full amount immediately upon receiving the demand.
Demand notes are often used for informal loans between family or friends, or for short-term financing where flexibility is key. They may be payable on a specific date if not demanded earlier, but typically they are payable when the lender asks.
In legal terms, a demand note creates an obligation that is due immediately upon execution, but the lender's right to demand payment is what triggers the borrower's duty to pay. If no demand is made, the borrower may not be required to pay until a specified maturity date (if any) or until a reasonable time has passed.
- No fixed repayment schedule; lender can demand payment anytime.
- Often used for informal or short-term loans.
- If no demand is made, the statute of limitations may start running immediately, potentially shortening the time to collect.
- Interest may accrue until payment is made, unless specified otherwise.
What Is an Installment Note?
An installment note is a promissory note that provides for repayment in regular, scheduled payments—typically monthly, quarterly, or annually—until the loan is fully paid off. Each payment includes principal and interest, reducing the outstanding balance over time.
This structure is common for personal loans, auto loans, mortgages, and many business loans because it provides predictability for both parties. The borrower knows exactly how much to pay each period, and the lender can budget for the cash flow.
Installment notes often include a final balloon payment or a maturity date when the remaining balance is due. They also typically contain provisions for late fees, prepayment penalties, and default acceleration clauses.
- Fixed repayment schedule with set payment amounts and due dates.
- Common for larger loans or loans with longer terms.
- Provides clarity and reduces disputes over timing of payments.
- May include late fees, prepayment penalties, and acceleration clauses.
Key Legal Differences and Implications
The most significant legal difference is when the loan becomes due. For a demand note, the loan is due immediately upon execution, but the lender must formally demand payment to trigger the borrower's obligation. For an installment note, the loan becomes due in installments as they come due, and the entire balance may become due only upon default (acceleration).
The statute of limitations for enforcing a demand note typically begins on the date the note is signed, because the loan is technically due immediately. In contrast, for an installment note, the statute of limitations generally begins on each missed installment's due date, allowing the lender to sue for missed payments without waiting for the entire loan to mature.
Demand notes are often easier to enforce in court because the lender can simply show the note and prove that a demand was made. Installment notes require more detailed record-keeping to prove each missed payment and the acceleration of the debt.
When to Use a Demand Note
Demand notes are ideal for short-term loans, bridge financing, or loans between parties who have a high level of trust and want maximum flexibility. For example, a parent lending money to an adult child for a down payment on a house might use a demand note so that the parent can call the loan due if needed.
They are also useful when the lender wants to avoid the administrative burden of tracking scheduled payments. However, because the loan can be called due at any time, borrowers should only enter into a demand note if they have the ability to repay on short notice.
In some states, if a demand note does not specify a repayment date, the lender must wait a 'reasonable time' after making the demand before taking legal action. This reasonable time is not clearly defined, so it's wise to specify in the note how much notice the borrower will receive (e.g., 30 days) to avoid ambiguity.
When to Use an Installment Note
Installment notes are best for loans where the borrower needs time to repay, such as financing a car, home, or business equipment. They provide a clear repayment plan that helps the borrower budget and the lender manage risk.
If you are lending a significant amount of money and want to ensure regular cash flow, an installment note is the better choice. It also makes it easier to track payments and identify defaults early, which can protect the lender's rights.
For borrowers, an installment note offers predictability and protection against a sudden demand for full repayment. It also allows the borrower to build a payment history, which can be beneficial for their credit score if the lender reports to credit bureaus.
How to Choose the Right Note for Your Situation
Consider the relationship between the parties, the amount of money, the purpose of the loan, and the repayment capacity of the borrower. If the loan is informal and small, a demand note may suffice. For larger, longer-term loans, an installment note is usually more appropriate.
Also consider the legal implications in your state. Some states have different rules for demand notes, such as the presumption that the loan is due immediately, which can affect the statute of limitations. Always check your state's laws or consult an attorney if you are unsure.
Regardless of which type you choose, it is essential to put the agreement in writing and include key terms such as the principal amount, interest rate (if any), repayment schedule (if applicable), default provisions, and signatures. A well-drafted note can prevent misunderstandings and provide legal protection.