What is a Demand Loan?
What is the Difference Between a Demand Loan and a Term Loan?
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 May Demand Loans Be Risky for Brokerage Houses?
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.