Broker Loan Rate
What it is:
The broker loan rate is the interest rate charged on the broker loans that brokerage houses use to fund their clients' margin trading accounts.
How it works (Example):
When banks or other lenders provide brokerage houses with broker loans loans to help cover their clients' margin accounts, the interest rate they charge is called the broker loan rate. Also known as a call loan rate, the broker loan rate fluctuates and compounds daily until the loan is repaid or called by the bank.
Why it Matters:
The fluctuating nature of broker loan rates their daily compounding makes broker loans rather risky. Should the bank call the associated loan, the borrowing brokerage house is obligated to pay the loan immediately, whether or not its clients' margin accounts have sufficient cash to cover the repayment. If they don't, then the brokerage house possibly will force its clients to sell their securities in order to obtain enough cash to repay the loan.