What is a demand clause in a loan agreement?

A demand clause in a loan agreement specifically grants the lender the right to require immediate payment of the outstanding loan balance at their discretion. This means that if certain conditions are met, or if the lender feels it is necessary due to risks associated with the borrower or the loan's underlying collateral, they can demand full repayment right away. Such a provision protects the lender and gives them the flexibility to manage their risk more effectively.

In a loan context, this clause can have significant implications for borrowers. It means that they cannot rely solely on the loan term for repayment and must be prepared for the possibility of having to pay off the loan earlier than expected if the lender exercises this right. This feature can be particularly relevant if the lender sees a decline in the borrower's creditworthiness or an increase in market risk factors.

The other choices do not accurately represent what a demand clause entails. Options involving requirements to increase payments, rights for the borrower to demand lower rates, or extending payment periods do not reflect the core function of a demand clause, which centers on the lender's power to seek immediate repayment.