Portfolio line of credit; underrated and misunderstood
We get it: you’re a long-term investor wanting to hold onto your beloved stocks. But you find yourself in a situation where you need a sizable chunk of cash. Did you know there is an easy option for you to access capital without selling your stocks? It’s called a portfolio line of credit. Otherwise known as borrowing against your stock portfolio. This cash is available at low interest rates – lower than most personal loans, auto loans, mortgages and HELOC’s1. Your stock is serving as collateral, and therefore reducing risk for the lender. Note that, even though your stock serves as collateral, you are still free to trade the stock2.
You may ask yourself why you haven’t heard of a portfolio line of credit before. You probably have, but didn’t realize it. Many trading platforms tell their customers about margin loans, but only in the context of using those funds to trade within that specific account — also known as good, old-fashioned leverage aka complex (and risky) investing strategies.
However, portfolio lines of credit have a more practical use — you can use it to withdraw money, and use these funds for anything you want.
How does a portfolio line of credit work?
In the case of a Frec Direct Indexing portfolio, the more diversified the portfolio, the lower the risk and the more you can borrow. You can borrow up to 70% of the value of your portfolio, with interest rates at 6.33% (as of Nov ‘23) compared to 20%+ for credit cards3. And unlike applying for a personal loan, with a portfolio line of credit, there is no background check or underwriting process. It’s all based on the size and components of your portfolio.
One of the main benefits is that you are not required to make any monthly principal payments on a portfolio line of credit. Instead, you will repay the interest. And even then, this interest doesn’t even need to be paid right away — you can simply add the amount of interest to the amount you borrowed. Frec’s interest rate is always the Effective Federal Funds rate plus 1%, which is lower than rates for the top five brokerage firms. With a portfolio line of credit, you can hold the borrowed amount indefinitely if your underlying securities continue to perform well and remain stable enough to borrow against.
What is a margin call and why does it have a bad reputation?
There is one circ*mstance in which you’d have to pay down a portion of the principal, and that is if you receive a margin call. This happens when the value of your stocks falls below what you have borrowed4. Let’s say that you took a portfolio line of credit for $20,000 (which was the max of what you could borrow). If the value of your portfolio drops to $19,000, you will be required to sell some stock or deposit cash to cover the $1,000 difference. Think of a margin call as an enforced “principal repayment” that comes due when the collateral is no longer safe for the lender.
Margin calls have a bad reputation because at most other brokerages, you’re left in the dark about when you might receive a margin call, or what will happen if you do. The old-school providers notify you when it happens without much warning. At Frec, we not only answer all of these questions for you, but we provide tools to help predict the likelihood of your receiving a margin call.
When you should consider a portfolio line of credit
Sophisticated investors have been employing this technique long time – often via wealth advisors and for the purpose of advanced trading. While that remains a use case, we see more potential in the more practical case of temporarily accessing cash at a low rate when you need to make a large purchase or cover unexpected expenses. Hit with a big tax bill? Need to pay for your children’s expensive tuition? Facing unexpected renovation costs? With Frec’s portfolio line of credit, there is no need to sell your stocks or become indebted to your credit card company.
Margin. What it is: Just as a bank can allow you to borrow against the equity in your home, your brokerage firm can lend you money against the value of eligible stocks, bonds, exchange-traded funds, and mutual funds in your portfolio.
If you own a large position in one or more stocks, lending your shares can be an easy way to earn passive income from your idle investments. Stock lending programs give you cash payments every time your shares are lent out, which you can reinvest, put toward diversification, or spend on other expenses.
Asset-based lending is the business of loaning money in an agreement that is secured by collateral. An asset-based loan or line of credit may be secured by inventory, accounts receivable, equipment, or other property owned by the borrower. The asset-based lending industry serves business, not consumers.
Because portfolio lenders hold their loans through maturity, and can't unload them, they accept higher risk and might charge higher rates and fees. Prepayment penalties: Portfolio lenders may charge a prepayment penalty, a fee incurred if you pay off your loan ahead of schedule.
You can then take out a Securities Backed Line of Credit (SBLOC). This kind of loan lets you tap into the value of your portfolio without having to sell off any assets and subsequently paying capital gains taxes.
Margin interest rates are typically lower than those on credit cards and unsecured personal loans. There's no set repayment schedule with a margin loan—monthly interest charges accrue to your account, and you can repay the principal at your convenience.
Margin accounts let you borrow money using assets in your account as collateral. Getting margin loans and using them to buy stocks won't impact your credit. Just be sure to maintain enough funds to meet minimum margin requirements. In some cases, you could wind up losing more money than you have in your account.
The main risks are that the borrower becomes insolvent and/or that the value of the collateral provided falls below the cost of replacing the securities that have been lent. If both of these were to occur, the lender would suffer a financial loss equal to the difference between the two.
Once logged in, proceed to the 'Account Features' tab in your Fidelity investment account.Here, you can access specific lending settings to disable the share lending feature. From the 'Account Features' tab, navigate to the 'Lending Settings' section.
Institutions typically borrow stocks for trading activities, like settlements, short selling and hedging risks. While you're allowing others to borrow your stocks, you still retain ownership over them and can sell them anytime you want.
They don't need to sell stocks, which would trigger capital gains taxes. 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.
One of the lesser-known benefits of a brokerage account is what's called a portfolio line of credit, also known as a margin loan. 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.
How is this possible? The low effective tax rate arises in part because U.S. billionaires with large stock portfolios and other appreciated assets can borrow money using their considerable financial assets as collateral and then pay little to no taxes on the cash they use to finance their lifestyles.
Yes, in many cases you can take a loan to cover the cost of exercising stock options. There are many different types of financing. Some are specifically geared toward financing private shares, while others are more general loans, where the funds are then used to exercise your options.
A personal loan is a common choice for getting money punting in the stock market since the lender does not pose restrictions for what you do with the money. However, taking a personal loan for speculative purposes like stock market investing is frowned upon by most lenders.
Most financial institutions will allow you to use your stocks as collateral for loans for various reasons: tuition, real-estate purchases or home renovations, new business startups and even to buy more stocks. They all have different qualifying criteria, limits and fees.
Borrowing money against the value of your investment portfolio can be a convenient and flexible way to fund other opportunities. This means that your portfolio remains invested, therefore participating in the returns of the markets, while acting as security for your loan.
Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
