A call loan, often referred to as a demand loan, is a type of loan in the financial industry that provides borrowers with short-term financing. Unlike traditional loans, call loans do not have a fixed maturity date or repayment schedule. Instead, they can be called or demanded by the lender at any time, with immediate repayment expected from the borrower. This unique characteristic of call loans offers flexibility to both lenders and borrowers, making them a valuable tool in various financial transactions.
The call loan market serves as a crucial component of the overall financial system, providing a mechanism for banks and financial institutions to manage liquidity and meet short-term funding requirements. Generally, call loans are used by institutional investors, such as banks and broker-dealers, to meet their temporary financing needs. They are also utilized by corporations to smooth out cash flow fluctuations or as bridge financing until more permanent funding can be arranged.
In the call loan market, interest rates are typically variable and tied to a benchmark rate, such as the federal funds rate. Lenders may charge a premium or spread over this benchmark rate to compensate for the added risk associated with the loan’s lack of fixed maturity date. Since lenders can require immediate repayment, the interest rates on call loans are typically lower compared to longer-term loans, such as mortgages or business loans.
Call loans are often secured by eligible collateral, such as marketable securities or other liquid assets. The value of the collateral helps mitigate the risk for the lender, as it can be sold if the borrower is unable to fulfill the repayment obligation. Collateral requirements may vary depending on the lender’s policies and the creditworthiness of the borrower. In some cases, lenders may establish a credit line, indicating the maximum amount of funds that can be borrowed under the call loan agreement.
Due to the nature of call loans, borrowers must be prepared to repay the loan on short notice. Lenders have the right to demand repayment at any time, and failure to comply can have serious consequences for the borrower’s creditworthiness. Therefore, it is important for borrowers to carefully assess their financial situation and ensure they have sufficient liquidity to meet potential call loan demands.
Call loans are not typically available to individual retail customers and are predominantly utilized by institutional investors and corporations. The call loan market operates primarily in the interbank market, where financial institutions lend and borrow funds from each other to manage short-term liquidity needs. However, individual investors can indirectly participate in call loan transactions through money market funds that invest in such instruments.
In conclusion, a call loan is a short-term loan that does not have a fixed maturity date or repayment schedule. It can be demanded by the lender at any time, making it a flexible financing option for institutional investors and corporations. Interest rates on call loans are typically variable and tied to a benchmark rate, with collateral often securing the loan. Call loans play a crucial role in managing short-term funding requirements and ensuring liquidity in the financial system.
This glossary is made for freelancers and owners of small businesses. If you are looking for exact definitions you can find them in accounting textbooks.