A Call Loan, also known as a Demand Loan or Broker Loan, is a type of short-term loan that a lender can demand to be repaid in full at any time. This flexibility allows the lender to “call” the loan whenever they require the funds, and the borrower must be prepared to repay the loan immediately. Call loans are often used in the financial markets, particularly by brokers and investors, to finance margin accounts or other short-term investment needs.

Key Aspects of a Call Loan:

1. Short-Term Nature:
   • No Fixed Maturity Date: Unlike traditional loans with a specified repayment schedule, a call loan does not have a fixed maturity date. Instead, the loan remains outstanding until the lender decides to call it or the borrower repays it.
   • On-Demand Repayment: The lender has the right to demand full repayment at any time, usually with little to no notice. This makes the loan highly flexible for the lender but requires the borrower to maintain liquidity to repay the loan when called.
2. Usage:
   • Brokerage Financing: Call loans are commonly used by brokers to finance the purchase of securities on margin. Investors who buy stocks on margin borrow money from their broker, who may in turn borrow from a bank through a call loan. The securities purchased serve as collateral for the loan.
   • Liquidity Management: Financial institutions may use call loans to manage short-term liquidity needs, allowing them to borrow and repay funds as necessary based on their cash flow requirements.
3. Interest Rates:
   • Variable Rates: The interest rate on a call loan is typically variable, often tied to the prevailing market rates or the federal funds rate. It can fluctuate frequently, reflecting changes in market conditions.
   • Interest Payment: Interest on call loans is usually paid at regular intervals, such as monthly or quarterly, depending on the agreement between the lender and borrower. The principal is repaid when the loan is called.
4. Collateral:
   • Secured by Assets: Call loans are often secured by the borrower’s assets, such as stocks, bonds, or other securities. The value of the collateral plays a crucial role in the lender’s decision to extend the loan and in determining the loan’s terms.
   • Margin Calls: In the context of margin trading, if the value of the securities used as collateral falls below a certain threshold, the lender (broker) may issue a margin call, requiring the borrower (investor) to either repay part of the loan or provide additional collateral.
5. Advantages:
   • Flexibility for Borrowers: Call loans offer borrowers flexibility in managing short-term financing needs without being tied to a long-term repayment schedule.
   • Quick Access to Funds: These loans can be arranged and accessed quickly, making them useful for taking advantage of short-term investment opportunities or managing immediate cash flow needs.
   • Potential for Lower Costs: Depending on market conditions, call loans may offer lower interest rates than other forms of short-term borrowing, particularly if they are repaid quickly.
6. Risks and Considerations:
   • Repayment Risk: The primary risk for borrowers is the lender’s ability to call the loan at any time. Borrowers must be prepared to repay the loan on short notice, which can be challenging if the funds are tied up in illiquid investments.
   • Interest Rate Fluctuations: Since call loans typically have variable interest rates, borrowers face the risk of rising interest costs if market rates increase during the loan period.
   • Market Volatility: For borrowers using call loans to finance securities purchases, market volatility can lead to margin calls, requiring quick repayment or additional collateral. This can be particularly risky during periods of market downturns.
7. Examples of Use:
   • Stock Market: An investor buys shares on margin through a brokerage account. The broker funds the purchase with a call loan from a bank, using the purchased shares as collateral. If the bank calls the loan, the broker must repay it, possibly requiring the investor to cover the cost.
   • Corporate Treasury: A corporation may use a call loan to cover short-term cash flow needs, such as payroll or inventory purchases, knowing that it can repay the loan as soon as its accounts receivable are collected.
8. Lender Perspective:
   • Liquidity Management: For lenders, call loans provide a tool for managing liquidity, allowing them to deploy excess cash temporarily and recall it when needed.
   • Credit Risk: Lenders typically assess the creditworthiness of the borrower and the quality of the collateral before issuing a call loan. The flexibility to call the loan reduces the lender’s risk exposure compared to longer-term loans.

In summary, a Call Loan is a short-term, on-demand loan that can be called for repayment by the lender at any time. It is commonly used in financial markets for purposes such as margin trading or managing liquidity. While call loans offer flexibility and quick access to funds, they also come with significant risks, particularly for borrowers who must be ready to repay the loan on short notice. These loans typically feature variable interest rates and are often secured by collateral, such as securities.