If you need to borrow money, you probably have a good idea of the most common options. There are personal loans that you can use for almost anything. If you're a homeowner, you could qualify for a home equity line of credit (HELOC). Credit cards are another popular choice, although they typically have high interest rates.
An option that doesn't get talked about as much is borrowing money against your investments. It's called a portfolio line of credit, also known as a margin loan. Many of the top stock brokers offer this, provided you meet their portfolio value requirements.
There are a few big benefits with this type of line of credit, so it's worth considering if you have enough in your brokerage account. Here's what you can expect when you get one.
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Your investments serve as collateral
A portfolio line of credit is backed by the investments in your account. That makes it a secured line of credit, similar to a HELOC, which is backed by your home.
The amount that you can borrow depends on the market value of your investments. It's generally anywhere from 30% to 70% of the value of your investments, depending on your stock broker.
You can get a low interest rate with no credit check
Your broker isn't taking much risk with a portfolio line of credit. If you don't pay, it has your investments as collateral. Because they're low risk, portfolio lines of credit tend to have low interest rates.
The interest rate will depend on your broker and the current market rate. You can usually expect a portfolio line of credit to cost less than a personal loan, and rates are often similar to HELOC rates. Keep in mind that this will be a variable rate, so it can go up or down.
There's also no credit check required to get a portfolio line of credit. Your credit score isn't a factor in getting approved or your interest rate.
The payment schedule is up to you
Another benefit of a portfolio line of credit is that there's no preset payment schedule. You're not required to pay a minimum amount, and there won't be any late fees if you don't make a payment by a certain date.
Your broker will charge interest on the outstanding balance, so you shouldn't carry a balance or stop making payments just because you can. But you'll have the flexibility to make payments based on what works with your current financial situation.
If the value of your investments drop, it could lead to a margin call or liquidation
The biggest risk of borrowing money this way is that the value of your investments could drop. If the value of your portfolio falls below the threshold for what you borrowed, two things can happen:
- Your broker can issue a margin call. You're then required to add cash to your account until you're back above the threshold
- Your broker can liquidate some of your investments. Brokers will typically issue a margin call first, but keep in mind that the terms normally say that they're not required to do this.
Let's say you have a $100,000 portfolio and can get a portfolio line of credit for up to 70% of that. You borrow $70,000. If the market declines and your portfolio drops to $90,000 in value, you'll be overleveraged. Your broker will issue a margin call, and you'll need to deposit $10,000. Otherwise, your broker could start selling your investments.
To be on the safe side, it's better not to borrow up to your limit. The more of a cushion you leave yourself, the less likely it is that you'll experience a margin call or a selloff.
A portfolio line of credit can be a good way to borrow money if you have a large investment portfolio. Make sure you fully understand how it works and the risks involved before you borrow, to avoid putting your brokerage account at risk.
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FAQs
With a portfolio line of credit your broker will lend you money against the value of your securities portfolio, using your stocks, bonds and funds as collateral for the loan. The larger your portfolio, the larger the amount you can borrow.
Can I borrow money against my investment? ›
A portfolio line of credit allows you to borrow money using your investments as collateral. Because this is low risk for your broker, you can get a low interest rate, and there's no credit check required.
Is it a good idea to borrow money to invest? ›
Your investments could just as easily lose value.
You could find yourself losing money on your investments while still needing to pay interest on the money you borrowed. And interest rates are high right now -- many brokers have margin rates of 12% or more.
How does borrowing against your own money work? ›
Basically, a passbook loan is a loan you take out against yourself. You are borrowing from your bank or credit union using your savings account balance as collateral. A passbook loan uses the balance of a savings account as collateral, which makes it lower risk for a lender.
How do rich people borrow against stock? ›
Instead, they can take loans against their shares. Securities based lending, securities based lines of credit, home equity lines of credit and structured lending are options for leveraging assets without selling them.
Is it better to sell stock or borrow against it? ›
Loan Against Shares: If you're faced with an unexpected medical expense that requires immediate funds, a loan against shares may not be the best choice due to the time required for processing. Selling shares would provide quick access to the needed funds.
How much can I borrow against my stocks? ›
A line of credit against your investments.
You may be able to borrow as much as 70% of the total amount of your portfolio, depending on the total amount you own and what you're invested in, and unlike many HELOCs, there are typically no annual fees.
Can I take a loan out against my stock portfolio? ›
While we typically think of our investments as a form of wealth-building, they can also come in handy when we need cash fast. Through what's called a portfolio line of credit (also known as a “margin loan”), investors can borrow against their taxable brokerage account at a moment's notice.
Can I borrow against my stocks to buy a house? ›
You may be able to borrow against the value of your stock portfolio to get a loan. Lenders may loan you up to 50% of your portfolio's value and hold your stock as collateral. The exact amount depends on the lender.
How do the rich borrow against assets? ›
Borrowing Against Assets
Rather than sell their highly appreciated position, an investor can instead borrow against it, says Miller. The advisor says the wealthy frequently do exactly that using a financial tool known as a securities backed line of credit, or SBLOC.
Rich people use debt to multiply returns on their capital through low interest loans and expanding their control of assets. With a big enough credit line their capital and assets are just securing loans to be used in investing and business.
How do millionaires live off interest? ›
Living off interest involves relying on what's known as passive income. This implies that your assets generate enough returns to cover your monthly income needs without the need for additional work or income sources. The ideal scenario is to use the interest and returns while preserving the core principal.
What are 2 things you should not do when borrowing money? ›
Be absolutely certain you avoid these three borrowing mistakes.
- Borrowing money you cannot afford to pay back. If you aren't 100% sure you can make payments on a loan you're thinking of taking out, just say no to borrowing. ...
- Borrowing money at too high of an interest rate. ...
- Taking out a loan you don't fully understand.
Borrowing to invest, also known as gearing or leverage, is a risky business. While you get bigger returns when markets go up, it leads to larger losses when markets fall. You still have to repay the investment loan and interest, even if your investment falls in value.
What are 3 disadvantages of borrowing money? ›
Loans are not very flexible - you could be paying interest on funds you're not using. You could have trouble making monthly repayments if your customers don't pay you promptly, causing cashflow problems. In some cases, loans are secured against the assets of the business or your personal possessions, eg your home.
Why would someone let you borrow a stock? ›
Securities lending is important to short selling, in which an investor borrows securities to immediately sell them. The borrower hopes to profit by selling the security and buying it back later at a lower price.
Are margin loans a good idea? ›
While margin loans can be useful and convenient, they are by no means risk free. Margin borrowing comes with all the hazards that accompany any type of debt — including interest payments and reduced flexibility for future income. The primary dangers of trading on margin are leverage risk and margin call risk.
Is it bad to pull money out of stocks? ›
It can be nerve-wracking to watch your portfolio consistently drop during bear market periods. After all, nobody likes losing money; that goes against the whole purpose of investing. However, pulling your money out of the stock market during down periods can often do more harm than good in the long term.
How much stock do you have to have to borrow against it? ›
Security-based lines of credit
It will review the value of your stock portfolio and approve you for a credit line, typically up to 50% of your stock portfolio's value. You'll be able to withdraw from your approved credit line as you need. Plus, you'll only need to pay interest on the amount you borrowed.
