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This story originally appeared on NerdWallet
This article is intended to be used for education purposes. NerdWallet is not a brokerage or advisory service. It does however recommend investments that include stocks and securities.
It happens. You might find yourself in need of quick money to pay a downpayment or cover unexpected expenses. However, it is possible that you are not sure if this warrants raiding emergency savings. It is possible to sell your investments but it depends on the market. If the market’s up, you’ll raise cash, but probably also acquire a capital gains tax bill. Selling might result in you taking a loss if the market is down.
There’s an alternative option: you can use your brokerage account to finance. A securities-based credit (or SBLOC) could give you cash access so that you can take advantage of an investment opportunity, or help you get out of a financial bind.
Consider this: Imagine you are shocked by a large tax bill. You don’t want to sell stocks or drain your savings just yet. Your annual bonus as a worker is due in just a few months. To bridge the gap, you could use your SBLOC and pay the loan off when your bonus arrives in your checking account.
What securities-based lending is all about
SBLOCs, also referred to as securities-based lending or portfolio financing, use your taxable brokerage account as collateral to back a revolving line of credit. You can decide how much you want to borrow, and when to pay it back.
Brokerage firms that offer this loan solution might require you to have a minimum account balance. They will then calculate your maximum credit limit — called the collateral value — using the securities in your account.
Tolen Teigen is a certified financial planner who also serves as chief investment officer for FinDec. FinDec is a financial consulting firm based in Stockton.
He suggests that you might be able to use 60-70 percent of the securities portfolio’s value as collateral.
The interest rate that you get will depend on how much assets you hold at your brokerage firm. Teigen states that the interest rates are often lower if you have more assets at the brokerage firm. This is why SBLOCs can be a good option for people with large account balances.
Why choose a line of credit that is securities-based?
Although there are many hurdles to overcome, the benefits of establishing a SBLOC go beyond capital gains tax implications or unwanted losses.
“It allows the investor to continue with their investment strategy without having to liquidate any holdings,” says Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Michigan. This means you won’t disrupt your portfolio’s asset allocation and can stay invested for the longer term.
Milan states that “typically, an investor can get cash quickly when they have to draw money from the credit line, which allows for flexibility.”
You can typically access the funds you need within days of your line being in place. You can have a backup plan even if your line is not in use. As long as you keep the collateral value, repayment is flexible.
SBLOCs are quick and can be cost-effective, due to current low interest rates. Stuart Blair, Director of Research at Canterbury Consulting, Newport Beach, California, states that SBLOCs may also prove fast.
However, you can’t use your securities-based credit line to purchase other securities, or pay back margin loans.
Keep these things in mind
Securities-based credit comes with risks. The biggest risk is the possibility that your collateral value will be affected by the fluctuations in the markets.
The broker may issue a maintenance order or add cash to your account if the account’s securities value falls below a threshold. You may have some securities removed if you are unable to pay the maintenance call. You may also be surprised to learn that your brokerage company has the power to sell any securities, including stocks and bonds you have currently purchased.
SBLOC rates are also variable and not set. Therefore, even though current interest rates may be low, they could change over the years and increase.
It is crucial to use your credit line based on securities responsibly.
Blair says that investors must determine how much leverage they can handle and create a variety of scenarios for testing their resolve.
It is important that you don’t take on more debt than you can handle. Milan and Teigen agree that backing your SBLOC using less volatile securities, such as blue-chip bonds or stocks, and using your credit card sparingly are all ways to reduce the risk and keep your securities-based credit useful.
Publié at Tue 10 August 2021, 00:24.45 +0000