DPN stands for Demand Promissory Note. Demand and promise are two main words to understand the concept of DPN in banking. While the demand comes from the lender, the borrower secures the promise. It is a document that plays a major role during loan repayment. To understand it better, you need to know how DPN works, the principles to follow, and why banks use this document while sanctioning a loan.
What is DPN?
A DPN (Demand Promissory Note) is a legal document that a bank maintains when there is no fixed period for loan repayment. The period depends on the ‘demand‘ of the lender, and the borrower must repay the amount immediately as ‘promised‘.
Usually, the lender provides advance notice for the borrower to be completely prepared to repay the loan amount. As there’s no set maturity date for DPN, it all depends on the bank to demand the amount.
It might seem more risky to apply for a loan without a predetermined period. While all conventional fixed-term loans include predetermined mutual rules, DPN offers more flexibility. Now, to understand which format is better suited for you, first understand the features of a demand promissory note.
How does DPN work?
DPNs, or demand promissory notes, are legally binding promises to repay a short-term loan amount. This promissory note protects the interests of both the payor and the payee. Demand Promissory Notes are critical to ensuring that both parties understand each other and that nothing is unclear.
Demand Promissory Notes (DPNs) are only accepted when a certain amount of money is at stake. The loan amount must be displayed in a widely accepted, legally acceptable unit of account.
The main four reasons to consider DPNs are as follows:
Flexibility: Demand promissory notes give both lenders and borrowers flexibility. The lender has more control over their cash flow because they can demand loan repayment at any time, without prior notice. The note’s flexibility benefits the borrower as well, allowing them to return the debt whenever they are able.
Lower Interest Rates: Demand promissory notes frequently carry lower interest rates as they are perceived to be less hazardous than other loan types. As a result, they are an attractive option for borrowers looking for an economical way to support their firm.
Speed: Demand promissory notes are an excellent option for businesses that want immediate funding because they are easy to come up with and can be concluded quickly.
Security: Since DPNs are secured by the borrower’s assets or other collateral, they offer the lender a higher degree of security. This may help to reduce the risk of default and ensure that the lender may get its funds back if the borrower is unable to repay the loan.
Banking Practices for DPN
There are three types of documents used by the bank for a loan. These are a DPN, an agreement, and a form. As per the standard regulations, banks need to adhere to a few basic rules regarding DPN. Note them and make sure your bank is following the same.
- The document in the Demand Promissory Note must be stamped as per the Indian Stamps Act.
- The borrower needs to repay the amount according to the agreed interest rate and the date decided by the lender without fail.
- Along with DPN, there’s an agreement that includes the loan amount, agreed rate of interest, rate of penal interest, percentage of margin, time-period of repayment, rights of the bankers (or borrower) in case of default of the loan, details of security charges, etc.
- After implantation, a single DPN may only be used for a maximum of three years. This is the window of time after which it expires.
Conclusion
It is better to understand all the standpoints of demand promissory notes. On the one hand, it’s flexible, but on the other hand, there’s no predetermined payment period. So one has to be sure of the repayment arrangements as soon as demanded by the lender. This article contains all the nooks and corners of DPN to help you out.