What is a Demand Loan?
A demand loan is a loan where the lender may require the borrower (a brokerage house) to repay at any time. These loans may also be called a broker loan or call loan,
What is the Difference of a Demand Loan and a Term 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.
On the flipside, 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.
A term loan is set up where the borrower has an agreed-upon length of time to repay a loan. For example, under a 30-year mortgage loan, a borrower is expected to repay the lender a fixed amount each month until the loan is repaid over a 30 year term. The borrower may pay off the loan sooner than the term too, though some lenders may charge a penalty for doing so.
Why Demand Loans Are Risky for Brokers
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.