Call Loan
Call loans, also known as callable loans, are short-term borrowing arrangements where lenders retain the right to demand repayment at their discretion.
Call Loans are a type of loan that lenders can demand to be paid back in full. These loans are designed to benefit the lender as they reduce the risk and, in most instances, are secured with collateral.
These loans are made with the idea that lenders may demand the borrower to repay the loan (In full) whenever needed. The loan is secured with collateral, as the nature of the short-term loan can often lead to unpaid loans.
Lenders often use these loans to achieve
- A short-term capital goal
- Regaining profits
- Securing low-risk credit with borrowers.
The bank will give a 24-hour notice to the borrower. After the notice has ended, the bank will take the collateral as payment.
This collateral is often in the form of valuable assets such as real estate, equipment, or vehicles. Still, in most instances of these loans, the portfolio of an investor will be liquified to pay for the remaining debt.
Even though loans are generally between a bank and a regular citizen, call loans are almost always between two large institutions, mainly brokerage firms—especially those with a history of margin call trading.
- Call loans are short-term callable loans.
- A bank can call a loan within a review window.
- Call loan rates (interest) are calculated daily.
- A called loan has a 24-hour notice.
- Institutions mainly use calls to purchase securities.
How do Call Loans Work?
As previously mentioned, CL (Call Loans) are mainly offered by banks to large institutions. More specifically, brokerage firms. These firms tend to take out these loans to finance a client's margin accounts.
While engaging in risky trades can potentially result in substantial losses for both the investor and the brokerage firm, they also present an opportunity for significant profits if executed wisely. It is the potential for such profits that drives firms to opt for these loans.
Unfortunately, these brokerage firms often will not have the capital required for their investors to go on a margin call. In addition, most margin calls require large purchases to make any profit. Therefore they take a short-term call loan from a bank to pay for a margin call.
Other than firms, these loans can also be given to individual borrowers. These loans are often used to buy stocks on a personal account but can also be used to buy assets.
Margin accounts are when an investor borrows money from a brokerage to buy securities and puts up their brokerage account as collateral.
Even though CB loans are used mainly for the same use. There are two main types of CB loans: Demand loans and Term Call Options.
1. Demand Loans
Demand loans are short-term loans. They are given out under the pretense that the borrower paid back the loan at the lender's request. These loans are secured and generally considered safe.
The collateral secures the loan and the money the lender lent out. Therefore, these loans are a good form of quick capital gain for these institutions.
2. Term Call Option
Terms call loans, on the other hand, are predetermined loans with a review. These reviews can happen yearly or quarterly to determine whether the borrower can repay.
If the review determines that the borrower is unreliable, the lender can request the loan be paid back. But the option to call back a loan can only be exercised during or after a review.
Call Loan Rates
Like most loans, they also come with interest rates. The interest rate is called the “Call Loan Rate” or “Broker’s Call” for these specific loans.
These rates are calculated daily based on the loan’s worth on that day, a borrower's financial health, and the loan's security. Failure to pay the Call Loan Rate can be seen as a sign of bad faith on the part of the borrower, which may trigger a demand for immediate repayment of the loan.
The rates play a significant role in determining the pricing of margin loans. The interest is usually 1 percent higher than the standard short-term rate at the time.
The rate is an important part of CL. A slight change in the daily rate could change the total money a borrower needs to pay back. Rates become a significant consideration when obtaining large loans to finance stock trades.
If the amount taken out is a large denomination, the stock bought with the loan will not only need to rise in value to the degree where the borrower can pay back the loan they took but also pay back the daily rate and make a decent profit.
How do Banks Call Loans?
When banks give out loans to an investment firm, the money is usually used to buy securities when an entity doesn’t have the funds. For example, an investment firm often takes out loans to buy securities for their home accounts.
The loans are given, and the account used and its securities (Stocks, Bonds, Etc.) will be put up as collateral.
When a bank calls for the repayment of a call loan, usually with a 24-hour notice, the investment firm must pay back the loan. If they can’t pay the loan within the notice, they often liquidate their accounts to compensate for the loss.
Although large investment firms can repay these loans quickly, the average borrower can’t make up a large sum of money on short notice. Therefore, Banks often give these average borrowers a plan to pay off their debt.
This can be in the form of monthly scheduled payments or deductions from salary/other sources of income.
Example of a Call Loan
Investment firm XYZ thinks a stock will appreciate over the next few weeks. They wish to capitalize on this surge and therefore take a short-term call loan to finance this decision.
- The firm believes that the stock will go up in value. They plan to sell the stock when the price has reached a level where the firm can pay back the loan and generate a profit.
- The firm takes out a call loan from Bank “ABC” and sets up the stock they will buy as collateral. The bank gives the firm the loan with interest.
- The bank approves the loan and establishes an agreement whereby the firm is obligated to repay the loan upon the bank's request.
- Unfortunately, the stock doesn’t go up. The value of the stock sinks, and now the value of the stock is disproportionate to the loan's value.
- The bank is afraid that the firm will continue to lose money with the stock they purchased.
The bank calls the loan back, and a 24-hour notice is set for the firm to pay the loan. If the firm fails to meet the repayment requirement, the bank will seize all the securities purchased by the firm.
In the event that the securities are insufficient to cover the outstanding debt, the collateralized account will be liquidated.
Call Loan FAQ
Most call loans have scheduled periods of review. These periods often look into a borrower's financial health, and if the collateral of the loan is securities, they look into the value of those securities.
If the bank deems either of those things true, the bank has the right to call back the loan and demand payment.
Most of these loans follow this rule, but some exclusionary loans allow their banks to call back a loan, usually in times of financial hardship.
Banks calculate the rate on a loan daily. The need for a daily rate is based on the longevity of the loan. The rate is based on the ability of the borrower to pay the loan, the value of the loan, and the standard rate.
It all depends on what you’re using the loan for. This loan may be a good possibility when you need a quick cash boost for an investment. But if you need a more secure loan or one that doesn’t put as much burden on you, a regular personal loan is better.
It depends on what factors affect your loan. What will you buy with the loan? Are you able to pay back this Loan? How is your financial health? All these questions should be asked when considering such.
Sources like the Bank of America and JP Morgan can inform you about a specific loan that would fit your situation the best!
In most instances, callable loans are used to buy investors to buy stock on margin (Buying stock with borrowed money). An investor will generally borrow and use money from their brokerage to buy a stock.
If the broker lacks the necessary funds, they will take out these loans to finance their investors. Often the account that borrower money will be put up as collateral to ensure the lender’s safety.
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