DEFINITION of 'Day Loan'

A day loan is a temporary transfer of funds from a bank to an individual broker or a brokerage firm that is made early in the day for the purchase of securities that same day. A day loan is often used in conjunction with a margin account at the brokerage firm. If a client wishes to buy securities on margin but needs additional cash on hand to do so, the broker can take out a call loan. While the call loan is being set up, the brokerage firm may facilitate a day loan so their client does not have to wait to buy the securities. The securities serve as collateral for the day loan, which must be repaid by the end of the day.

Also called a "morning loan."

BREAKING DOWN 'Day Loan'

A day loan is a source of very short-term funding. The brokerage must pay the bank back by the end of the day. 

An Example of a Day Loan

Bert is a client at Ernie's brokerage. Bert wishes to purchase securities in his margin account, but does not have enough remaining cash to front 50% of the purchase price of the securities. Ernie's brokerage agrees to take out a day loan to finance the missing cash. Ernie's brokerage contacts Snuffy's bank, who lends Ernie's brokerage the funds in the form of a day loan. Ernie's brokerage must pay Snuffy's bank back the money by the end of the day. Bert purchases the securities in his account, and is also able to transfer more cash into the brokerage account to cover the amount of the loan.

RELATED TERMS
  1. Selling Away

    Selling away is when a broker solicits a client to purchase securities ...
  2. Bucketing

    Bucketing is a situation where a broker confirms an order to ...
  3. Term Loan

    A term loan is a loan from a bank for a specific amount that ...
  4. Problem Loan

    A problem loan is a loan in which the borrowers cannot or are ...
  5. Collateral Value

    A collateral value is the estimated fair market value of an asset ...
  6. End Loan

    A permanent, long-term loan used to pay off a short-term construction ...
Related Articles
  1. Insights

    An Introduction to Government Loans

    Government loans provide more benefits than private loans are available in many areas, including business, education, housing, disaster relief and more.
  2. Retirement

    10 Ways to Borrow in Retirement

    Before you take money from your nest egg, consider these 10 other ways to borrow in retirement.
  3. Personal Finance

    College Loans: Private vs. Federal

    Not all student loans are the same. Learn the difference between federal vs private student loans.
  4. Personal Finance

    Different needs, different loans

    When it comes to loans, there are many different types according to your needs. Find out what options are available when it comes to borrowing money.
  5. Investing

    Bank Failure: Will Your Assets Be Protected?

    The SIPC and FDIC insure against personal financial ruin when banks or brokerages go belly up.
  6. Personal Finance

    Getting a loan without your parents

    Do you want to receive a loan without the help of your parents? Use these five tips to finance your dreams without banking on a second signature.
  7. Personal Finance

    Home Improvement Loans: What Are Your Best Options?

    If you plan on taking out a home improvement loan, you should know what your options are and which ones might be best for your situation.
  8. Personal Finance

    8 Cheaper Ways to Raise Cash Than Car Title Loans

    Before you sign up for a car title loan, investigate these eight alternate cash-raising strategies rather than using the value of your lien-free vehicle.
  9. Personal Finance

    The Best Way to Borrow

    There are many ways to secure funding. Find out the pros and cons of each way to borrow.
  10. Personal Finance

    Student Loan Asset-Backed Securities: Safe or Subprime?

    Similar to the mortgage-backed securities that caused the 2008 recession, student loan asset-backed securities could lead to the next financial crisis.
RELATED FAQS
  1. What is the difference between initial margin and maintenance margin?

    Learn the difference between an initial margin requirement and a maintenance margin requirement and how these affect an investor's ... Read Answer >>
Trading Center