DEFINITION of 'Call Loan'

A call loan is a loan that the lender can demand to be repaid at any time. It is "callable" in a similar sense as a callable bond. The key difference is that in the case of 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. Call loans are often made by banks to brokerage firms and used for short-term financing of client margin accounts when more cash on hand is needed in order to make credit available to brokerage clients so they can buy securities on margin. The interest rate on a call loan is called the call rate and is calculated daily. It is usually one percentage point higher than the going short-term rate. A brokerage firm can repay a call loan at any time with no prepayment penalty.

BREAKING DOWN 'Call Loan'

Call loans can be used for short-term financing of brokerage firms' client margin accounts. 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. Usually, banks will give brokerage firms 24 hours notice to repay the loan. Securities must be pledged as collateral for the loan. The loan can essentially be canceled at any time since the brokerage firm can prepay the loan without penalty and the lending bank can call the loan for repayment whenever they please.

Example of a Call Loan

For example, 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 they have loaned. ABC Bank can call the loan and demand repayment within 24 hours.

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