What is a Callable Loan?

Malcolm Tatum

Often referred to as a call loan or a demand loan, the callable loan is simply a financial transaction in which the lender retains the right of demanding repayment of the full value of the loan. The lender’s demand usually includes the balance due, plus any applicable interest. When the lender chooses to exercise his or her right of demand, the borrower usually has a short period of time in which to comply.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Callable loans have a couple of important advantages. One of their more attractive features is that they tend to be issued at a rate of interest that is below what is normally applied in standard bank loans. While the difference is usually no more than a percentage point, this can translate into a significant amount of savings for the borrower. At the same time, the loan does carry an interest rate that is higher than federal funds rates or the rates on Treasury bill notes.

Second, the borrower can pay off this type of loan at any time, usually without any type of penalties. The combination of these two factors can make it an attractive option when an investor needs a source of short-term cash flow. In this scenario, the borrower anticipates being able to settle the debt well before the maturity date listed on the loan, as well as before the lender chooses to call the loan due.

There are two points to keep in mind with a callable loan. Loans of this type carry an interest rate that is calculated daily, and in fact, the rate is quoted daily online and in newspapers and is used by many investors and brokers as a money market indicator. Second, the investor is allowed to use securities in his or her possession as collateral for the loan. During the period that the loan is in effect, those securities cannot be sold or exchanged.

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