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.

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