Question 1

What does "payable on demand" mean?

Accepted Answer

"Payable on demand" means the lender can require full repayment of the outstanding balance at any time by giving the borrower a demand notice. Unlike a term note with a fixed maturity date, a demand note has no set repayment deadline. The lender can call in the loan whenever they choose, and the borrower must pay within a reasonable time after receiving the demand. Most demand notes specify a notice period (commonly 30-60 days) to give the borrower time to arrange payment.

Question 2

What is the difference between a demand note and a term note?

Accepted Answer

A term note (also called a time note) has a fixed maturity date when the full balance is due. Payments follow a set schedule, and the lender cannot demand early repayment unless the borrower defaults. A demand note has no fixed maturity date — the lender can demand full payment at any time. Demand notes offer more flexibility but less predictability for both parties. They are often used for informal arrangements, family loans, and short-term business financing.

Question 3

Does a demand note require a demand letter?

Accepted Answer

Yes, the lender must provide written notice (a demand letter) to the borrower requesting payment. While some demand notes are technically due the moment they are signed, most include a notice period (30, 60, or 90 days) that gives the borrower time to arrange payment. The demand letter should be sent via certified mail and clearly state the amount owed, the demand for payment, the deadline to pay, and consequences of non-payment.

Question 4

What is a "reasonable time" to pay after demand?

Accepted Answer

Under the Uniform Commercial Code (UCC), if a demand note does not specify a time for payment, the borrower must pay within a "reasonable time" after demand. Courts have generally interpreted this as 30 days, though it can vary depending on the circumstances (loan amount, borrower's ability to pay, industry norms). To avoid ambiguity, specify the exact number of days in the note itself.

Question 5

Are demand notes commonly used for family loans?

Accepted Answer

Yes, demand notes are one of the most popular structures for family loans. They offer flexibility — the lender (family member) can call in the loan if they need the money, but there's no pressure of fixed monthly payments or a hard deadline. For IRS purposes, the note should charge at least the Applicable Federal Rate (AFR) to avoid the loan being treated as a taxable gift.

Question 6

When does the statute of limitations start on a demand note?

Accepted Answer

This varies by state and is a commonly litigated issue. In some states, the statute of limitations begins when the note is signed (because it is technically due immediately). In others, it begins when the lender makes a formal demand for payment. Some states have specific provisions for demand instruments. Check your state's laws carefully, as this can significantly affect your ability to collect.

Question 7

Can a demand note accrue interest?

Accepted Answer

Yes, demand notes can and often do accrue interest from the date the loan is made. The interest rate must comply with state usury laws. Interest may accrue on the outstanding balance until the loan is fully repaid. If the note is between family members, charging at least the IRS Applicable Federal Rate (AFR) is important to avoid the loan being reclassified as a gift for tax purposes.

Question 8

Can a demand note be secured by collateral?

Accepted Answer

Yes, a demand note can be either secured or unsecured. If secured, the lender would also have a security agreement and, for personal property, a UCC-1 filing. Combining a demand feature with collateral gives the lender maximum flexibility: they can call in the loan at any time AND seize the collateral if the borrower fails to pay. However, most demand notes are unsecured, particularly those used for family and personal loans.

Feature	Demand Note	Term Note
Maturity Date	None — payable when demanded	Fixed date (e.g., 12 months)
Payment Schedule	Optional — can be flexible	Fixed monthly/quarterly payments
Lender Flexibility	Can call loan at any time	Must wait until maturity (unless default)
Borrower Certainty	Less certain — loan can be called	More certain — fixed timeline
Best For	Family loans, informal lending	Formal loans, bank financing

Component	Description
Borrower & Lender Names	Full legal names and addresses
Principal Amount	Total loan amount in numbers and words
Interest Rate	Annual rate compliant with state usury laws
Demand Clause	States the note is payable on demand with specified notice period
Notice Period	Number of days borrower has to pay after demand (30-90 days typical)
Demand Letter Requirements	How demand must be delivered (certified mail, hand delivery, etc.)
Prepayment Rights	Borrower\u0027s right to repay early without penalty
Signatures	Dated signatures of borrower and lender

Free Demand Promissory Note Template

What Is a Demand Promissory Note?

Payable on Demand

Family & Friends

Flexible Repayment

Demand Promissory Note by State

Demand Note vs. Term Note

Common Uses for Demand Notes

Family Loans

Friend-to-Friend Loans

Business Lines of Credit

Shareholder Loans

Bridge Financing

Estate Planning

Key Components of a Demand Promissory Note

Sample Demand Promissory Note

DEMAND PROMISSORY NOTE

Frequently Asked Questions

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