What it is:
How it works (Example):
Also known as a call loan or demand loan, a broker loan is granted to a brokerage house in need of short-term capital for financing clients' margin portfolios. The lending bank can call the loan at any time. Likewise, the brokerage house may repay a broker loan in full without prepayment penalties. Broker loans are collateralized using securities, and interest accrues daily at an unsecured adjustable rate.
Why it Matters:
Used to provide capital for margin trading, broker loans are a risky financing scheme for brokerage houses vis-à-vis clients. In addition to interest that accrues quickly, broker loans may be called by the lender any time, possibly requiring the use of proceeds from the sale of client securities if the brokerage firm is not solvent enough to repay the loan with its own cash.