Call Loan

What Is a Call Loan?

A call loan is a loan that the lender can demand to be repaid at any time. A call loan is similar to a callable bond. However, while a callable bond is callable by the borrower, a callable loan is callable by the lender.

A call loan is designed to reduce the financial risk of the lender. The lender may choose to recall a loan to mitigate the risk that the borrower will not be able to satisfy its debt in the future. This may be evident by declining credit, declining collateral value, or unfavorable macroeconomic conditions.

Key Takeaways

  • A call loan is a type of loan where the lender can demand full payment of the loan at their request.
  • A lender will call a loan if the borrower's credit has deteriorated, the borrower's collateral as lost value, or if the lender is worried about the borrower's future ability to make payment.
  • A call loan is most often used between banks and brokerage firms, as brokerage firms often secure short-term financing for client margin accounts.
  • Individual borrowers will more likely be offered installment payment loans or revolving credit (i.e., credit cards) instead of callable loans.
  • The interest rate on a call loan is recalculated each day and is highly contingent on prevailing market rates, supply and demand of funds, and macroeconomic conditions.

How a Call Loans Work

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.

Call loans are also made to individuals or businesses, and there are two different main types of callable loans for these borrowers. First, a demand loan is often in the form of a line of credit. Loan proceeds drawn on this line of credit may be callable at any moment.

Second, a lender may offer a term call option. The lender will review the loan and the borrower on a predetermined cadence. For example, the lender may offer a 10-year loan with a scheduled loan review every other year starting in the second year of the loan. The lender has the right to call the loan during these review periods but may not call the loan outside of review intervals.

Banks, which often make call loans to brokerage firms so they finance client margin accounts, can request repayment at any time.

Special Considerations

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.

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.

Individual borrowers have access to callable loans, though lenders will often extend installment loans for these clients. As individual borrowers will be less likely to be able to pay the entire principal balance upon demand, lenders will often turn to relying on monthly payments over a fixed schedule. Individual borrowers often rely on revolving credit as well (i.e., credit cards) where a variable amount is due based on the individual's purchase history.

Call loans were created in the 1920s as a way to promote economic activity while protecting lenders from deteriorating borrower credit.

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.

What Is a Call Loan?

A call loan is a type of loan where the lender has the ability to call or demand full repayment. Certain conditions may be required in order for the lender to be able to call their loan.

How Do Banks Call Loans?

When a brokerage firm enters into a callable loan, proceeds from the loans used to buy securities are often placed as collateral for the loan. When a bank calls the loan, they may require immediate liquidation of the holdings or may be entitled to proceeds of sale should the borrower have missed a payment obligation.

When a bank calls a loan, the borrower often has a specified period (i.e, 24 hours) to satisfy the new obligation amount.

What Does Call Money Mean?

Also known as "at call money" or "money-at-call," call money is any loan that is payable in full immediately on demand by a bank. Call money loans are often very short-term and often loans between one financial institution to another.

What Is the Call Loan Rate?

A call loan rate is the short-term interest rate a lender charges a broker-dealer on a call loan. The call loan rate usually fluctuates every day and is quoted in several periodicals such as the Wall Street Journal. The rate is also determined by prevailing market rates, fund supply and demand, and macroeconomic conditions.

When Can Banks Call Loans?

In general, banks can legally call a loan as long as the conditions have been agreed to as part of the loan conditions. In some circumstances, the loan may be called at any time. In other cases, payment must be missed, a collateral balance must drop below an approved amount, or the borrower must have failed compliance conditions.

Article Sources
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  1. Federal Reserve. "The Tools and Transmission of Federal Reserve Monetary Policy in the 1920s."

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