Answer: Securities-based loans, also known as SBLs, are a unique way to access cash by pledging your investment portfolio as collateral. SBLs use the investments in your taxable brokerage account as collateral. These investments can include stocks, bonds, exchange-traded funds (ETFs), and other eligible securities.
Instead of fixed payments over a specific period, SBLs provide a revolving line of credit. You can borrow and repay as needed without a rigid repayment schedule. Brokerage firms offering SBLs typically require a minimum account balance. The maximum credit available to you (the collateral value) is calculated based on the eligible securities in your account. However, due to market volatility, you won’t receive a dollar-for-dollar loan. Usually, you can use around 60% to 70% of your securities portfolio value as collateral. The interest rate you are charged depends on the amount of assets you hold at the brokerage firm. Larger account balances often result in lower interest rates.
The advantages of SBLs include liquidity, generally lower rates, and no set payback payment plan. Need quick cash? SBLs offer access to funds without selling your investments. This can be especially useful during market downturns when selling stocks might lock in losses. SBLs typically offer lower interest rates compared to credit cards or other forms of credit. Unlike traditional loans, SBLs don’t require fixed monthly payments. You decide how much to borrow and when to repay.
Examples:
Let’s say you receive an unexpected high tax bill. Instead of depleting your emergency savings or selling stocks, you can tap into your SBL. By using your investment portfolio as collateral, you access cash without disrupting your long-term investment strategy.
SBLs may be used to purchase real estate. Many home buyers are required to make a 20% downpayment, which is a significant amount of money in today’s real estate market. Even if buyers have the funds in their bank or investment accounts, they may not want to use those funds, and may not have to if you have an investment portfolio offering greater flexibility.
There are potential drawbacks making it essential to understand the terms, interest rates, and potential consequences before using SBLs. For instance, if the value of the borrower’s assets decreases, the lender may ask for additional funds. The borrower may also have limited trading abilities if the pledged securities are mutual funds or stocks. Even though the borrower has eliminated or reduced the down payment, they will pay interest on the full price of the home, and if they default on the loan, they could lose both the home and their assets.
Always speak to your CERTIFIED FINANCIAL PLANNER™ Professional to learn more and find out if it’s a suitable strategy for you. Stay focused and plan accordingly.
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