
Call Loan –
A call loan is a loan that the lender can demand to be repaid at any time. However, the loan can essentially be canceled at any time since the brokerage firm can repay the loan with no prepayment penalty and the lending bank can call the loan for repayment whenever it pleases. Call loans are often made by banks to brokerage firms, which use them for short-term financing of client margin accounts when more cash on hand is needed in order to make credit available to brokerage clients to buy securities on margin. The key difference is that with a call loan the lender has the power to call in the loan repayment, not the borrower, as is the case with a callable bond. Occasionally, brokerage firms may use the proceeds of a call loan to buy securities for their own house accounts, to purchase trading securities or for underwriting purchases.
What Is a Call Loan?
A call loan is a loan that the lender can demand to be repaid at any time. It is "callable" in a sense that is similar to a callable bond. The key difference is that with a call loan the lender has the power to call in the loan repayment, not the borrower, as is the case with a callable bond.
Understanding a Call Loan
Call loans are often made by banks to brokerage firms, which use them for short-term financing of client margin accounts when more cash on hand is needed in order to make credit available to brokerage clients to buy securities on margin. The interest rate on a call loan is called the call loan rate or broker's call and is calculated daily. The call loan rate forms the basis upon which margin loans are priced. It is usually one percentage point higher than the going short-term rate.
Banks, which often make call loans to brokerage firms so they finance client margin accounts, can request repayment at any time.
Occasionally, brokerage firms may use the proceeds of a call loan to buy securities for their own house accounts, to purchase trading securities or for underwriting purchases. Securities must be pledged as collateral for the loan. Usually, banks will give brokerage firms 24 hours' notice to repay the loan. However, the loan can essentially be canceled at any time since the brokerage firm can repay the loan with no prepayment penalty and the lending bank can call the loan for repayment whenever it pleases.
Example of a Call Loan
ABC Bank makes a call loan to XYZ Brokerage. XYZ Brokerage pledges securities as collateral for the loan. Over the next few days, the stock market has a correction and the value of the collateral for the loan no longer adequately compensates ABC Bank for the amount it has lent to XYZ Brokerage. ABC Bank calls the loan and demands repayment within 24 hours.
Related terms:
Broker's Call Defined
The broker's call, also known as the call loan rate, is the interest rate charged by banks on loans made to brokerage firms. read more
Call Money
Call money, also known as "money at call," is a short-term financial loan that is payable immediately, and in full, when the lender demands it. read more
Callable Bond
A callable bond is a bond that can be redeemed (called in) by the issuer prior to its maturity. read more
Call Loan Rate
A call loan rate is the short-term interest rate charged by banks on loans extended to broker-dealers. read more
Collateral , Types, & Examples
Collateral is an asset that a lender accepts as security for extending a loan. If the borrower defaults, then the lender may seize the collateral. read more
Line of Credit (LOC) , Types, & Examples
A line of credit (LOC) is an arrangement between a bank and a customer that establishes a preset borrowing limit that can be drawn on repeatedly. read more
Margin
Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of investment and the loan amount. read more
Margin Account and Example
A margin account is a brokerage account in which the broker lends the customer cash to purchase assets. When trading on margin, gains and losses are magnified. read more
Money-at-Call
Money-at-call is any type of short-term, interest-earning financial loan that the borrower has to pay back immediately when the lender demands. read more