Demand ClauseCredit Repair Definition
A loan provision allowing the lender to require full repayment at any time, even if the borrower is current on payments.
Definition
A demand clause, also known as a demand feature or callable loan provision, is a term in a loan agreement that gives the lender the right to demand immediate repayment of the entire outstanding loan balance at any time, for any reason, even if the borrower has been making all payments on time and is not in default. These clauses essentially turn the loan into a short-term obligation at the lender's discretion. While relatively rare in standard consumer loans like fixed-rate mortgages or auto loans, demand clauses are more common in certain types of business loans, lines of credit, or bridge financing where the lender wants maximum flexibility. Borrowers should be extremely cautious when signing agreements containing demand clauses, as they introduce significant uncertainty and risk.
Frequently Asked Questions
Why would a lender include a demand clause?
Lenders include demand clauses to minimize their risk, particularly in situations involving fluctuating interest rates, uncertain borrower financial stability, or short-term financing needs. It gives them the ultimate flexibility to exit the loan if market conditions change or they perceive increased risk, without needing to prove a specific default by the borrower.
Are demand clauses common in mortgages?
No, demand clauses are very uncommon in standard fixed-rate residential mortgages in the U.S. Most consumer protection laws and standard mortgage documents do not allow lenders to demand full repayment unless the borrower defaults on specific terms (like missing payments or failing to pay property taxes).
What should I do if a loan agreement contains a demand clause?
Carefully review the implications. Understand that the lender can call the loan due at any time, potentially forcing you to refinance or sell assets unexpectedly. Try to negotiate its removal or modification. If removal isn't possible, assess whether the loan's benefits outweigh the significant risk introduced by the demand feature, and consider seeking financing elsewhere if possible.
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