Should You Take Out a Loan Backed by Your Investments?

Securities-based lending, also known as portfolio lines of credit or loans against investments, allows you to borrow money using your stock portfolio or other securities as collateral. This approach provides liquidity without forcing you to sell assets, potentially avoiding capital gains taxes and keeping your investments growing.

These loans are popular among investors with substantial portfolios who need cash for purchases like homes, business ventures, or emergencies. Lenders typically advance 50-70% of the portfolio’s value at low, often variable interest rates in the single digits. However, market volatility introduces significant risks. This article examines the mechanics, advantages, drawbacks, alternatives, and key considerations to help you decide if it’s right for you.

What Is a Loan Backed by Your Investments?

A

securities-based loan

(SBL) or

portfolio line of credit

is a revolving credit facility secured by marketable securities in your brokerage account. Unlike traditional loans, approval hinges on collateral value rather than credit score, making it accessible even for those with imperfect credit.

Here’s how it works:

• Collateral Pledge: You pledge non-retirement assets like stocks, bonds, or ETFs. Lenders set a loan-to-value (LTV) ratio, often 50-95% depending on asset volatility (e.g., 50-60% for stocks, higher for bonds).
• Funding: Draw funds as needed, similar to a HELOC. No credit check is required since securities back the loan.
• Interest and Repayment: Rates are variable, tied to benchmarks like SOFR plus a spread (e.g., 3-7%). Pay interest-only monthly; principal is flexible with no prepayment penalties.
• Maintenance Requirements: Maintain a minimum equity level (e.g., 30-50%). If portfolio value drops, you face a margin call.

Offered by banks, brokerages like Charles Schwab or Interactive Brokers, and wealth managers, these products suit high-net-worth individuals but are available to those with $100,000+ in eligible assets.

Pros of Loans Backed by Investments

These loans shine for disciplined investors seeking liquidity without disrupting long-term strategies. Key benefits include:

• **Low Interest Rates:** Collateral reduces lender risk, enabling rates far below unsecured loans or credit cards (e.g., 4-8% vs. 20%+).
• **Retain Portfolio Growth:** Avoid selling assets during downturns, preserving compound returns and diversification.
• **Tax Efficiency:** No capital gains trigger. Interest may be deductible if used for investments (consult a tax advisor). Assets get a step-up in basis at death.
• **Flexible Access:** Funds available quickly, often same-day. No fixed repayments; reusable line.
• **Credit-Friendly:** Minimal underwriting; viable for lower credit scores.

Feature	Securities-Based Loan	Personal Loan	Margin Loan
Interest Rate	4-8% variable	6-36% fixed	6-12% variable
Credit Check	No	Yes	Broker-dependent
Tax on Sale	No	N/A	No
Repayment	Interest-only, flexible	Fixed schedule	Flexible

As shown, SBLs offer superior terms for qualified borrowers.

Cons and Risks of Borrowing Against Your Portfolio

While attractive, these loans amplify market risks. Major drawbacks:

• **Margin Calls:** If collateral drops below thresholds (e.g., due to 20% market crash), deposit cash/securities or face forced liquidation—potentially at losses.
• **Variable Rates:** Costs rise with Fed hikes; no cap on some products.
• **Restricted Access:**strong> Pledged assets can’t be freely traded/withdrawn without lender approval. Broker may hike requirements anytime.
• **Overleverage Risk:**strong> Borrowing >50% LTV heightens wipeout potential in downturns.
• **Opportunity Cost:**strong> Interest erodes returns if portfolio underperforms.

Historical example: During 2022’s bear market, many faced calls as stocks fell 25%+. Always model worst-case scenarios.

Who Should Consider This Type of Loan?

Ideal candidates:

• High-Net-Worth Investors: $500K+ liquid portfolios for buffer against volatility.
• Long-Term Holders: Confident in asset recovery; low withdrawal needs.
• Tax-Sensitive: Avoiding gains brackets or Medicare surcharges (age 65+).
• Diversified Portfolios: Stable mix reduces call risk.

Avoid if: Short-term horizon, high debt, undiversified holdings, or risk aversion.

Alternatives to Securities-Backed Loans

Not convinced? Consider these:

• Home Equity Line (HELOC): Lower rates (4-6%), real estate collateral, tax-deductible interest.[Bankrate knowledge]
• Personal Loans: Fixed rates/payments; unsecured but higher rates for bad credit.
• 0% Balance Transfers: Short-term bridge for credit card debt.
• Selling Assets Strategically: Harvest losses for tax offsets; rebalance portfolio.
• Asset-Based Business Loans: For entrepreneurs, using receivables/inventory.

Option	Rate	Risk Level	Best For
Securities Loan	Low	High (market)	Investors
HELOC	Low	Medium (home)	Homeowners
Personal Loan	Medium-High	Low	Fixed needs

5 Tips If You Decide to Borrow Against Your Investments

1. Conservative LTV: Borrow <40% to weather 30-50% drops.
2. Diversify Collateral: Mix stocks/bonds for stability.
3. Liquidity Buffer: Keep 6-12 months cash elsewhere.
4. Stress Test: Simulate crashes; ensure affordability.
5. Read Fine Print: Understand call triggers, rate caps, restrictions.
6. Monitor Actively: Track markets; have repayment plan.

Frequently Asked Questions (FAQs)

What qualifies as collateral for these loans?

Typically stocks, bonds, ETFs in taxable brokerage accounts. Retirement accounts (IRAs/401(k)s) ineligible due to restrictions.

How much can I borrow?

50-95% LTV based on asset type/ volatility. E.g., blue-chip stocks: 60-70%; crypto: lower.

What happens in a margin call?

Lender demands more equity. Comply or they liquidate collateral without notice, possibly at loss.

Are interest payments tax-deductible?

Potentially if proceeds fund investments; not for personal use. IRS rules apply—seek professional advice.

Is this better than selling stocks?

Often yes for tax deferral and growth retention, but only if returns exceed interest + risks.

Securities-based lending can be powerful for savvy investors but demands discipline. Consult a financial advisor to align with your goals and risk tolerance.