When a broker makes arrangements to borrow funds on behalf of an investor, lending institutions generally charge what is known as a broker loan rate. Essentially, the broker loan rate is a special rate of interest that banks and other financial institutions extend to a broker as part of the loan package. Generally, broker loan rates are more aggressive than the interest rates that a consumer would be able to command if applying for a loan.
There are two basic functions of the broker loan rate that make the option attractive for many brokers. First, the rate of interest for broker loans is highly competitive, which makes the act of securing a loan on behalf of an investment client worth the time and effort. Second, the broker loan rate allows the broker to strengthen ties with investment clients. The stronger rapport between broker and client helps to minimize the chances that a valuable client will take his or her business elsewhere.
For the investor, having a broker handle the arrangements for a loan to finance margins on an investment opportunity means that the rate of interest is most likely better than the investor could command by going for the loan directly. In addition, the investor does not have to spend a great deal of time and effort with the loan acquisition process. From the perspective of saving money on the transaction and not having to invest much in the way of time, making use of a broker and the call money rate extended to the broker only makes sense.
Generally, a brokerage will have certain guidelines or standards in place that the client must meet before a broker will seek to finance the underwriting of new issues through a loan with a broker loan rate. Often, these guidelines involve a certain amount of business generated with the brokerage, the presence of certain assets that can be used to guarantee the loan, and a working relationship between broker and client that has resulted in the creation of an atmosphere of mutual trust. When these types of factors exist, a broker is often happy to seek a loan for a client that carries a broker loan rate.