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What is a Call Loan?

Mary McMahon
Mary McMahon
Mary McMahon
Mary McMahon

A call loan is a type of loan which is repayable on demand, rather than being repaid on a fixed schedule. Call loans are most commonly seen in brokerage houses, although they can appear in other contexts as well. While they can be a flexible and powerful tool for funding various endeavors, they can also be very dangerous, because the borrower is exposed to the risk of having the loan “called,” meaning that the lender demands the payment in full at any time.

One classic use of the call loan is in margin trading. When people establish an account with a stockbroker, they can set up a margin account, which allows them to borrow money from the broker for the purpose of buying stocks, a practice known as trading on the margin. The money is loaned in the form of a call loan so that the broker can call the loan if the value of the stock falls abruptly, ensuring that the broker gets its money back.

When people establish an account with a stockbroker, they can set up a margin account, which allows them to borrow money for the purpose of buying stocks.
When people establish an account with a stockbroker, they can set up a margin account, which allows them to borrow money for the purpose of buying stocks.

In the case of margin trading, if the customer is unable to repay the loan when requested, the broker can liquidate some of the borrower's stock to repay the loan. While trading on the margin can potentially generate a substantial profit by allowing people to work with more money than they have to take advantage of good trends in the stock market, it can also expose them to substantial losses. Since the broker can sell stock without asking if a customer fails to repay the call loan when requested, a customer could easily lose everything by trading on the margin if stock values fall precipitously.

Banks also work with call loans, issuing call loans to other banks as needed to increase liquidity. Bank A might, for example, take out a call loan from Bank B to ensure that it can cover the payroll checks which it knows will be coming in. Many banks issue call loans for 24 hours and sometimes even less, moving huge sums of money around in the process. Some cash advance and “payday” loans are also call loans, occasionally with a usurious rate of interest and terms which are very unfavorable to borrowers.

Usually, when a lender decides to call a loan, it gives the borrower some warning. Brokerage houses, for example, will call clients in the morning to inform them that their loans will be called, so that they have a chance to organize funds to cover the loan. A call loan may go for days, weeks, or even months without being called if the lender feels comfortable, since interest will be racking up all the while, but borrowers should not depend on prolonged inaction when it comes to a call loan.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...
Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Learn more...

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    • When people establish an account with a stockbroker, they can set up a margin account, which allows them to borrow money for the purpose of buying stocks.
      By: Minerva Studio
      When people establish an account with a stockbroker, they can set up a margin account, which allows them to borrow money for the purpose of buying stocks.