Call loan- also known as money at call
A call loan falls to be administered by any payable system or pattern. What am I trying to say? The Call loan is a loan in which the lender can demand payback at any time or even at the discretion of the borrower. At any point, the lender can call up for repayment while the borrower will have to comply. This credit activity is usually for some set of firms. Let’s find out who and who cannot apply for this loan.
Call loan lenders are full-time banks and are offered to brokerage firms. This set of companies often comes for help to manage their client’s margin accounts whenever cash is needed to lend to their brokerage clients while clients buy securities on margin. However, it calculates the interest rate daily. Its interest rate is known as Call Loans Rate or Broker’s call. Moreover, it is the interest rate that determines the price of margin loans.
As a brokerage firm seeking the call loans, also know that the call loan lenders (Banks) can request for repayment at any time. Nevertheless, a Call loan is usually one point higher in interest rate other than the short-term rate. But the bank will give the brokerage firm 24 hours notice to repay. When the firm can repay, the loan can be canceled with no prepayment penalty. Most firms use this call loan to buy securities most especially for trading securities, or for underwriting purchases.
The instance of a Call Loans
Assuming a bank (YZ) makes a call loans to a brokerage (FNC) with pledges on securities as collateral for the loans. And on the next few days, the bank (yz) is no longer interested in the value of the collateral; the bank can quit and demand repayment within 24 hours.
- It provides capital for margin trading
- Call loans may be taken back by the lender at any time to avoid accruing interest.
- This loan is a risky financing method for brokerage firms