Legal Definitions - call loan

A call loan is a type of loan that the lender can demand repayment for at any time, without prior notice. Unlike traditional loans with fixed repayment schedules, the borrower must be prepared to return the borrowed funds immediately upon the lender's request. This flexibility makes call loans particularly useful for short-term financing in financial markets, where liquidity needs can change rapidly.

Here are some examples to illustrate how call loans work:

• Brokerage Firm Financing: Imagine a large bank providing a call loan to a stock brokerage firm. The brokerage firm uses these funds to help finance its clients' margin accounts, allowing clients to buy securities by borrowing a portion of the purchase price. If there's a sudden, significant drop in the stock market, the bank might perceive an increased risk. To protect itself, the bank could "call" the loan, demanding immediate repayment from the brokerage firm. The brokerage firm would then need to quickly secure alternative funds or liquidate some assets to repay the bank.

• Interbank Lending: Consider two banks, Bank A and Bank B. Bank A has a temporary surplus of cash, while Bank B needs a very short-term infusion of funds to meet its daily reserve requirements. Bank A might offer a call loan to Bank B. If, later in the day, Bank A experiences an unexpected large withdrawal from a major corporate client, it might suddenly need its cash back. Bank A can then "call" the loan from Bank B, requiring immediate repayment to cover its own liquidity needs.

• Private Investment Fund: A small, specialized investment fund might secure a call loan from a wealthy individual to capitalize on specific short-term market opportunities. The agreement allows the individual lender to request their money back at any point. If the wealthy individual suddenly decides to make a large personal investment, such as purchasing a new business, they can "call" the loan from the investment fund. The fund would then be obligated to return the borrowed capital promptly, potentially by selling off some of its current investments.