Security Backed Loans: Are They a Good Idea?

Many people with very high net worth lack the liquidity for major purchases.

If you wish to make a high dollar purchase such as a house or car selling a portion of your portfolio isn’t always attractive.

If you qualify, security backed loans could provide the cash flow you need.

Use this easy to follow guide to find out the costs and benefits of securities based loans and if they work for you.

What Are Security Backed Loans

A securities-based loan is a loan that uses any kind of security as collateral. Common securities include stocks and bonds.

If you have a substantial portfolio you may have a very high net worth but limited liquidity. Stock borrowing allows you to access the equity within your portfolio without having to sell.

Banks and many brokers provide a stock secured loan. Simply talk to your wealth management consultant or check with a third party provider. You’ll need to place a certain amount of your stocks in a secured account.

Pros

The biggest benefit to taking out a security-based loan is that you don’t have to sell your securities. This makes it possible to hold use the equity in your stocks or other security without selling.

If you believe that a stock you hold is going to experience major growth over a period of time you probably don’t want to sell it.

A securities loan is also a nontaxable event. If you sell your security you’re required to pay capital gains taxes on the gains. By taking out a loan on their value you avoid this entirely. The relatively low interest rates on these loans are often lower than the tax burden would be. 

Tapping the value of an unvested or restricted stock is another benefit of a securities loan.

Cons

Like any loan, you’ll have to make interest payments. There’s also the risk that your investments could lose value and leave you unable to repay the loan. 

If your included investments drop below a certain threshold you’ll have to either pay down your balance or add more stocks. Most lenders have procedures in place to liquidate part of your holdings.

This liquidation process generally takes place only after a significant drop in the securities value. 

Who Loans Secured by Securities Are For

Securities based lending is usually only available for high net worth investors with an understanding of complex financial transactions. Many banks refuse to deal with investors without a net worth in the millions of dollars.

A securities loan is a great way to make major purchases such as buying a car, art, or a home. If you are involved in a startup that is rising in value you can also use a securities lender to help you access your equity before an IPO or buyout.

Make sure you fully understand the lending process and what you’re agreeing to.

Balance Short and Long Term Goals

Before you take out security backed loans make sure you know what you’re doing. They can be an excellent way to access liquidity, but only if you do so responsibly.

For more information about securities based lending, or to apply for a loan, contact us here for a free consultation.