The Gains of Stock Collateral Loans
By the end of 2017, Elon Musk, the billionaire who owns Tesla, had leveraged up to 40% of his stock in Tesla for collateral loans!
Although we don’t know why he did it or what he used the money for, we just know that he did it.
If a billionaire can be in need of quick capital, perhaps the rest of us should consider a collateral loan when we need some quick cash.
Read on to learn more about these loans.
What Are Stock Loans?
A stock loan is a personal loan against collateral in the form of non-marginable stocks, rather than the borrower having to put their physical assets up as collateral.
The Federal Reserve Board regulates whether or not a stock is marginable or non-marginable.
A stock collateral loan is a loan against stock the borrower already owns, unlike short-selling stocks which involve a loan against shares they do not own.
How Do these Loans Work?
To take out a stock collateral loan, the borrower transfers ownership to the lender who owns the stock during the life of the loan. The amount they will lend the borrower depends on the quality of stock being put up for collateral.
The borrower agrees to pay a fixed interest rate and the lender gives them the money. The lender may charge a fee upfront (or not) and the lender earns any dividends issued on the loan stock while they own the stock.
In exchange, the borrower pays the agreed upon fixed-interest rate in installment payments during the term of the loan.
How Much Can Be Borrowed
The amount the borrower can borrow against their stock will depend on the broker and the features of the stock. The lender will take the following into account:
- How much is the stock is currently worth
- The number of shares being put up for collateral
- How volatile they expect the stock to perform in the market
Because they are lending money based on collateral which can go up or down in price over the course of the loan, don’t expect to be able to borrow the full market value of the stock. The lender will have to pay the borrower less to cover their risk in case the stock price falls.
At a minimum, a borrower should be able to find stock collateral loans for between $50,000 and $5,000,000 dollars.
How Long Until the Loan Needs to be Paid Back
Depending on the lender, a borrower can get loans for different lengths of time.
But a borrower should be able to find a lender who will let them borrow money for one, two or three years.
What Happens if the Loan Defaults
If the borrower defaults (doesn’t pay the installment interest payments) on the loan, the lender can seize the collateral.
This means the lender will permanently own the stock the borrower transferred to them as collateral.
If the loan defaults, unlike other loans, there will be no negative hit to the borrower’s credit report.
Why People Use these Loans
People who need capital/cash fast at a low-interest rate find these loans attractive since the lender can get them the loan amount quickly and for less money than putting it on their credit card.
The lender won’t need to do a credit check and there is no negative credit report risk even if the loan defaults.
If Fast Cash is Needed, Consider Collateral Loans
People need cash or capital for a variety of reasons.
With a stock loan, a borrower doesn’t have to say why they want the money. They just have to have qualifying stocks and find a lender willing to give it to them.
How they leverage or use the borrowed money is also up to them.
For more information about collateral loans, please contact us to speak with a specialist.