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.
How a Call Loan Works
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.
[Important: 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.