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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free – so that you can make financial decisions with confidence.
Our articles, interactive tools, and hypothetical examples contain information to help you conduct research but are not intended to serve as investment advice, and we cannot guarantee that this information is applicable or accurate to your personal circumstances. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.
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Borrowing against your investments is a line of credit option that many brokers offer exclusively to their clients. A portfolio line of credit can either be a margin account or a securities-based line of credit. A margin loan is an extension of credit from your broker that uses the securities you own as collateral. The funds can be used for short-term needs or to increase your investments.
A securities-based line of credit, unlike a margin account, cannot be used to purchase securities or pay down margin loans and the funds cannot be deposited into any brokerage account. These are also known as non-purpose margin loans.
Not familiar with this type of a line of credit and not sure what type of funds are eligible to borrow against? Only funds in a taxable investment account qualify; funds in tax-advantaged retirement accounts and cash accounts, among others, do not qualify for a portfolio line of credit. So if your funds are in an IRA, you are not eligible for a portfolio line of credit.
Here’s what else you should know about a portfolio line of credit including the main risks to be aware of.
Each brokerage company sets the minimum amount that must be invested to be able to borrow. Some firms only require $10,000, but other companies may require $25,000 or more. The percentage available to borrow also varies by firm — 30 percent is typical, but some firms may allow you to borrow up to 60 percent of your total portfolio value. For example, if you have $10,000 in your account and your broker allows borrowing up to 35 percent of the portfolio’s value, you can borrow $3,500.
Be aware that minimum amounts and percentages available to borrow differ for margin and non-purpose margin loans.
Money borrowed from a portfolio line of credit can be used for many different purposes:
A portfolio line of credit can be used as a supplement to traditional borrowing options such as bank loans and credit cards or as an alternative method of financing. Once approved, money can be accessed through checks, ACH or wire transfers typically in 1-3 business days. But some companies make the funds available in 24 hours or less.
Borrowing against your investments is usually a cheaper way to take out a loan when compared to credit cards or bank loans, since the loan is backed by collateral.
According to Wells Fargo Advisors, when leveraging your securities to meet a liquidity or capital need, be sure to consider whether the potential reward will cover the cost of borrowing and associated risks as well as whether borrowing against your securities could adversely impact your investment performance.
Many money managers recommend clients establish a portfolio line of credit even if they don’t use it, since it is helpful to have multiple borrowing options available.
One alternative option is a home equity line of credit (HELOC).
Things to consider when contemplating a HELOC include:
You could also use more traditional loans as an alternative to a portfolio line of credit such as personal loans, car loans or credit cards.
The annual interest rate for a portfolio line of credit typically varies by the amount of assets you hold with the brokerage firm, with rates typically lower for those with higher account balances. Although interest rates have been rising, these lines of credit can still offer some of the lowest rates around to borrowers who qualify.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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