Definition
A call loan, also known as a demand loan, is a short-term loan that the lender can require to be repaid at any time. These loans typically don’t have fixed dates of repayment and the lender can “call” the loan, demanding repayment in full immediately. Call loans are often used in money markets by brokers to fund margin accounts.
Key Takeaways
- A Call Loan is a type of short term loan provided to brokers to cover their obligations on margin trades.
- Such a loan can be ‘called in’ or demanded for repayment by the lender at any given time, often without notice, making it highly flexible from the lender’s perspective.
- The interest rates on call loans are typically variable and adjust with changes to the overall interest rate environment.
Importance
A Call Loan, also known as a demand loan, is important in finance due to its flexibility and direct impact on liquidity management.
Unlike other loans, a call loan can be recalled by the lender at any time, demanding repayment on short notice, which can provide security for lenders in volatile markets.
Simultaneously, borrowers can repay such loans without prepayment penalties, allowing them to manage debts actively.
Therefore, the call loan is a critical financial tool for unpredictable economic circumstances, as it allows both lender and borrower to quickly adapt and react.
Thus, the term holds high relevance in discussions around financial risk management, portfolio strategy, and market liquidity.
Explanation
The principal purpose of a Call Loan is to fulfill the short-term financial needs of a borrower, providing them with flexibility that would not be typically accorded through conventional loans. Also referred to as a demand loan, this financial instrument allows the lender to request the loan repayment at any given time, thus the term ‘call’ loan.
Typically, this form of loan is used by brokerage houses that need to fund margin accounts for their clients, allowing them to buy securities without having to immediately provide all the requisite capital. As it provides the necessary financial fluidity, a call loan has become an integral tool for businesses and brokerage firms.
These loans can be called at any moment, hence necessitating the borrower to always have a readiness to repay the borrowed amount. This nature of the call loan ensures that the lender is protected if they suddenly require their lent funds, and this sudden ‘call’ of the loan can be often associated with market volatility or a borrower’s declining financial condition.
Thus, a call loan offers an immediate source of liquidity for both individuals and businesses in need of quick funds, while also safeguarding the lender’s interests.
Examples of Call Loan
A Call Loan, also known as a Demand Loan, is a type of loan which can be demanded by the lender to be repaid at any point. The repayment involves the amount of the loan plus interest. Here are three real-world examples of its usage:
Broker’s Call: In stock market trading, brokerage firms often offer call loans to investors who engage in margin trading. When an investor purchases securities on margin, the broker finances part of the purchase and secures the loan with the purchased securities. If the value of the securities drops significantly, the broker might issue a margin call demanding the investor to repay part or all of the loan at short notice.
Bank to Bank Lending: Banks often use call loans to lend excess funds to other banks that are in need of immediate liquidity. These loans are typically very short-term and the lending bank has the right to call back the loan at any time.
Business Operations: Many businesses utilize call loans for their short-term funding needs. For example, they could procure such loans for funding inventory purchases, bridging cash flow gaps or dealing with unexpected expenses. The lender can ask for the loan to be paid back at any time, often depending on the company’s financial stability and creditworthiness.
FAQ Section: Call Loan
What is a Call Loan?
A Call Loan is a short-term bank loan that can be called for repayment on demand. These loans are typically used by broker-dealers to fund margin accounts. The interest rate on a call loan is calculated on a day-to-day basis.
Who typically uses Call Loans?
Broker-dealers primarily use call loans to fund the buying of securities on margin by their clients. Large financial institutions such as commercial banks typically provide these loans.
What is the interest rate on a Call Loan?
The interest rate on a call loan is referred to as the ‘call rate.’ It fluctuates daily depending on market conditions. Generally, the rates are comparable to short-term rates in the money market.
What are the risks associated with Call Loans?
The associated risks with call loans are that the lender may demand repayment of the loan at any time. Additionally, if the call rate increases significantly, the interest payments on the loan can become quite high.
What happens if a Call Loan is not paid back on demand?
If a call loan is not paid back on demand, the lender has the legal right to sell the securities that have been bought using the loan’s funds in order to collect their principal plus any accrued interest.
Related Entrepreneurship Terms
- Interest Rate
- Short-term Loan
- Margin Call
- Liquidity
- Collateral
Sources for More Information
- Investopedia: This extensive finance-oriented website provides numerous articles and tutorials explaining the details of various financial terms including Call Loans.
- The Balance: A comprehensive personal finance resource where one can find relevant information about Call Loans.
- Bloomberg: Known for its up to date business news, Bloomberg also provides detailed insights into various financial concepts such as Call Loans.
- Bankrate: A trusted online source that provides comprehensive information about financial concepts, including Call Loans.
