How to Take Out a Loan Against Stocks

Obtaining a loan secured by your stock portfolio offers a way to access funds without liquidating investments. This type of borrowing, known as a securities-based loan, allows individuals to maintain their investment strategy while addressing liquidity needs.

What is a Securities-Based Loan?

A securities-based loan (SBL) is a loan where an individual uses their investment portfolio as collateral. These loans are classified as “non-purpose” loans, meaning the borrowed funds cannot be used to purchase additional securities. Instead, the funds can be utilized for various personal or business expenses, such as real estate purchases or tax payments. This distinguishes SBLs from traditional margin loans, which are designed for buying more securities.

SBLs are offered by banks or brokerage firms and are often for larger amounts and longer terms compared to margin loans. The core concept involves pledging marketable securities held in an investment account, allowing the borrower to access capital without selling assets and potentially incurring capital gains taxes. Interest accrues on the borrowed amount, and the investment portfolio continues to generate returns, such as dividends and capital appreciation. This arrangement enables individuals to maintain their investment position while accessing necessary liquidity.

Understanding Loan Terms and Requirements

Before applying for a securities-based loan, prospective borrowers should understand several key terms. A primary consideration is the loan-to-value (LTV) ratio, which represents the maximum percentage of the collateral’s value a lender will lend. This ratio ranges from 50% to 70% for diversified portfolios of publicly traded stocks and bonds, and can be higher, up to 90%, for less volatile assets like certain Treasury securities. LTV ratios vary based on the types and diversification of the securities pledged.

Interest rates on securities-based loans are variable, tied to a benchmark rate such as the Secured Overnight Financing Rate (SOFR) or the Prime Rate, plus an additional spread. These rates are more competitive than those for personal loans or credit cards. Interest payments are structured monthly, calculated daily on the outstanding loan balance, and some agreements allow for interest-only payments for a period.

Lenders accept a variety of liquid securities as collateral, including diversified portfolios of publicly traded stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Illiquid assets, restricted stock, thinly traded securities, and assets held in retirement accounts are not accepted. Providers require a minimum investment account value to qualify, often $100,000 or more, though this varies by institution.

Repayment structures for SBLs are flexible, with many offered as revolving lines of credit. This allows borrowers to draw funds as needed up to their credit limit, repay principal, and then borrow again. Some loans may have an interest-only payment period followed by a balloon payment, while others allow for principal repayment at the borrower’s discretion, often without prepayment penalties. Eligibility criteria include having an eligible brokerage account; creditworthiness is considered but may be less stringent than for traditional loans due to the collateralized nature of SBLs.

Applying for a Securities-Based Loan

The process of applying for a securities-based loan begins with contacting a financial advisor, brokerage firm, or bank that offers these lending solutions. This initial discussion helps determine if an SBL aligns with your financial needs and if your investment portfolio qualifies.

You will then submit necessary documentation for the application. This includes recent investment account statements for the securities intended as collateral, and sometimes basic financial information or identification. The lender will review your portfolio to assess the eligibility and value of the collateral.

The application proceeds to a review and approval phase. While traditional credit checks are less emphasized than for unsecured loans, the primary focus remains on the quality and liquidity of the pledged assets. Upon approval, you will sign a loan agreement that outlines the terms, conditions, and covenants of the loan.

Once the loan agreement is finalized, the funds are disbursed to your designated bank account. This process can be quick, with funds available within a few business days, or sometimes even within 24 hours.

Managing the Loan and Potential Risks

Managing a securities-based loan involves understanding ongoing obligations and potential risks, particularly market volatility. A significant risk is the possibility of a margin call, also known as a collateral call. This occurs if the market value of your pledged securities declines below a predetermined threshold.

If a margin call is issued, the borrower is required to take action, such as depositing additional cash or eligible securities, or repaying a portion of the loan. If the borrower fails to meet the margin call within the specified timeframe, the lender has the right to sell some or all of the pledged securities to cover the loan balance, often without prior notice. This forced sale can occur at unfavorable market prices and may impact your long-term investment strategy.

The volatility of the stock market means the value of your collateral can fluctuate significantly. A substantial market downturn could lead to multiple margin calls, potentially forcing the liquidation of a large portion of your portfolio. This risk highlights the importance of not overleveraging and maintaining a conservative loan-to-value ratio.

Regarding tax implications, the proceeds from a securities-based loan are not considered taxable income because they are borrowed funds, not realized gains. However, the deductibility of interest paid on the loan depends on how the funds are used. If the loan proceeds are used for investment purposes, the interest may be deductible as investment interest expense, subject to limitations and rules outlined by the Internal Revenue Service in IRS Publication 550. If the funds are used for personal, non-investment purposes, the interest is not tax-deductible. Forced sales of securities due to margin calls can also trigger capital gains taxes if the liquidated assets have appreciated in value. It is advisable to consult a tax professional for personalized guidance.