Bank loans fall through sometimes. This is due to insufficient credit or lack of collateral–real state, an automobile, or equity in a home. All is not lost when this happens.
Customers have the option of borrowing or lending from stocks they own through stocks loans and securities lending.
Borrowers often confuse these alternatives. But there is a difference. Securities lending is the process of borrowing stock to sell it. Stock loans vary in options of secured and unsecured.
Let’s discuss the two.
Stock Loans vs. Securities Lending: What’s the Difference?
Often defined as the same option, stock loans and securities lending differ in the lending process.
It’s best to study the benefits and disadvantages of both prior to choosing a loan type.
Stock Loans at a Glance
A stock loan is a collateralized loan granted by a bank or lending entity (firm) and funded by the lender using shares of stock as the collateral for the loan.
Borrowers use stock loans to gain quick access to liquid assets, buy investments, and purchase real estate. The length of the loan, the quantity of shares pledged, and other metrics affect the loan amount.
There are two basic types of stock loans:
Secured Stock Loan
This loan type requires a borrower’s use of collateral–normally shares of stock. With a secured loan, borrowers may take out as much as 75% of the value of the stock.
Pledging stock as the sole collateral helps borrowers protect other private possessions. If they default on the loan, they don’t stand to lose any other personal assets.
Also, if the stock value declines, certain restrictions permit the borrower to walk away from the loan. It is a nonrecourse loan which means the borrower has NO PERSONAL LIABILITY for repayment.
Unsecured Stock Loan
Unsecured stock loans don’t require collateral. They compare to bond loans in that they have fixed returns and set pay-off dates. In the event of a default, the lender has no claim on the borrower’s assets.
These loans vary in type–convertible and irredeemable. Convertible unsecured stock loans may be turned into equities at the expiration of the loan. Irredeemable doesn’t allow for cash redemption, but borrowers do gain access to new capital in the market.
Two to five years is the typical term span for a stock loan. For this reason, lenders encourage borrowers to steer towards larger loans to avoid wasting time on smaller loan amounts. As with other loans, certain fees apply to all stock loans.
Securities Lending
This process involves the temporary lending of a stock. Borrowers use cash or security as forms collateral, as they retain temporary ownership of the security.
Investors capitalize on the market by short-selling securities. As the temporary owner, the borrower sells the security then buys it back at a cheaper price.
The lender makes money on the fees and retains ownership of the security at the end of the transaction. The borrower earns income during the sell and buyback.
In Summary
Stock loans and securities lending are viable loans options. Though both may require collateral, they differ by definition and process. Study both alternatives, weighing pros and cons.
As recommended, speak with a loan specialist to learn the risks prior to taking out any loans.
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