A short-term loan known as a call might have its repayment demanded at any time by the lender.
Definition and Example of Call Loans
The term “callable” refers to a loan’s ability for its lender to demand repayment at any moment. Unlike installment loans, which are often repaid according to a predetermined schedule, they are not. Call loans are usually obtained by stock brokers or brokerage businesses borrowing money from financial institutions. Equity instruments, typically stocks, which serve as collateral for the loan, guarantee these loans.
- Alternate name: Broker loans, broker overnight loans
A broker borrowing money from a financial institution to buy shares for a customer who wishes to invest on margin is an example of a call loan. Purchasing security on margin entails borrowing money and using the security as collateral, using stock as a form of investment as collateral guarantees the loan and limits the lender’s risk. The broker could continue to borrow money over time, or the lender could demand repayment immediately, perhaps requiring the security used to guarantee the loan would be sold.
How Do Call Loans Work?
Call loans gained traction in the 1920s. To obtain a loan, banks or other financial institutions of different sizes would speak with a broker either directly or via the money desk at the New York Stock Exchange. Equities were used as collateral and, like stocks, might be sold if the lenders decided to call the loans.
Lenders rarely enforced prompt repayment of call loans, despite having the power to do so. Instead, the loans were daily renewed, allowing brokers and customers to keep using the borrowed money to maintain their market investments.
Due to the widespread use of call loans by financial institutions, borrowers whose loans were called typically had no trouble locating new sources of credit. They would then pay off the old loan with the new one the original lender who had called the loan.
Call loans are a common tool used nowadays to help boost the liquidity of stock exchanges. Brokers can borrow money for margin purchases by investors or settle daily stock transactions using call loans. To improve their purchasing power, investors use margin, however, this strategy can be dangerous because it exposes the investor to possible losses. The investor loses money if the value of the stock declines, and they also have to sell their investment at a loss to raise the money required to pay back the lender.
However, banks with insufficient cash reserves can be forced to call in their call loans in the event of a banking crisis. This could exacerbate the issue because it would force brokerage firms or brokers to sell stocks quickly to repay their loans could cause stock prices to plummet.
Alternatives to Call Loans
Although all loans are available to individual investors, they are normally primarily used for one specific purpose—purchasing securities on margin. Additionally, brokers and brokerage firms are the main recipients of calls loans.
A personal loan, such as an installment or revolving loan, would likely make more sense if you needed to borrow money. Installment loans that are secured, or backed by collateral, are available. They may also be unsecured, in which case you wouldn’t need to put up any assets as collateral for the loan. In contrast, to call loans, your lender might not be allowed to demand immediate repayment of an installment loan. Typically, you’ll follow a defined timetable and make a predetermined number of payments.
A personal loan, for instance, can have a six-year payment term and a $500 monthly payment requirement from your lender. On the other hand, the interest rate you pay may vary depending on the lender and your credit history and score.
Revolving accounts, which can include credit cards or credit lines, are yet another category of personal loans. Both secured and unsecured loans are available. Revolving account holders often have to make the minimum monthly payments, but unlike call loans, they are typically not able to demand immediate repayment of the debt.
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