What is the Call Loan Rate?
The call loan rate, also known as the 'broker loan rate', is the interest rate charged on the call loans used by brokerage houses to fund clients' margin trading accounts.
How Does the Call Loan Rate Work?
When banks or other lenders provide brokerage houses with call loans to help cover their clients' margin accounts, they charge an interest rate called the call loan rate. The call loan rate fluctuates each day and compounds daily until the loan is repaid or called by the bank.
Why Does the Call Loan Rate Matter?
The fluctuating nature of the call loan rate paired with its daily compounding make call loans fairly risky. Should the bank call the associated loan, the borrowing brokerage house must pay the loan right away, regardless of whether its clients' margin accounts have enough cash to cover the repayment. If they don't, then the brokerage house may force its clients to sell their securities in order to raise enough cash to repay the call loan.