Term vs Open Stock Loans

Most stock loans in the US are structured as "open" loans: there's no fixed end date, either party can terminate on short notice (the lender can recall the stock, the borrower can return it), and the borrow fee floats daily based on prevailing market rates for that stock. This flexibility suits both sides for ordinary short-selling, where nobody knows in advance how long a position will be held.

A term loan instead locks in a fixed duration (say, three months) and a fixed rate agreed upfront. The borrower gives up the flexibility to end the loan early without penalty, but gains certainty: the fee won't spike even if the stock suddenly becomes much harder to borrow. The lender gives up the option to recall the stock or reprice it if borrow demand surges, in exchange for a locked-in fee it can count on for the full term.

Worked example

A hedge fund expects to hold a short position in a stock it believes will become increasingly hard to borrow over the next quarter, as more short sellers pile in. Rather than use an open loan, where the daily fee could spike from 1% to 15% if the stock goes "hard to borrow," the fund negotiates a three-month term loan locked in at a 4% annualized fee today — paying more upfront than the current open-loan rate, but insulating itself from the borrow-cost spike it's betting will happen.