What it is:
How it works (Example):
Also called a broker loan or call loan, a demand loan is granted to a brokerage house needing short-term capital for financing the margin portfolios of clients. The lending bank can demand the repayment of the loan at any time. At the same time, the brokerage house may repay a demand loan all at once without prepayment penalties. Demand loans are collateralized using securities, and interest accrues everyday at an unsecured adjustable rate.
Why it Matters:
Used to supply capital for margin trading, demand loans are risky financing choices for brokerage houses vis-à-vis clients. In addition to interest rapidly accruing interest, repayment can be demanded by the lender at any time, possibly necessitating the use of earnings from the sale of client securities if the broker is not solvent enough to repay the loan using its own cash.