Well, what do you know? There’s more in stocks than just investment. Just when you thought that stocks are just there as extra funds for the future, you’re in for a surprise.
Yup, stocks can be used as collateral and secure your loans too! But don’t get too excited, the procedure is not quite as simple as leisurely walking right into a financial institution and asking for cash in exchange for your stock investments.
This is how it goes.
When you loan money against the stock value, you receive a securities-based loan. A security-based loan is different to some degree compared to other loans. Other bank lenders call this type of loan as stock loans or stock-based loans.
Some small financial lending institutions consider this type of loan as a line of credit. You may find securities-based loans in some brokerage firms or banks. Nonetheless, just like any other thing on this planet, a securities-based loan has its own set of upsides and downsides.
Okay, to cut to the chase, securities-based loans basically open your investment portfolio’s value. Incidentally, this type of loan can also use mutual funds or bonds as security. The loan lender can allow you to borrow the value from fifty to ninety-five percent of your assets. But the percentage will depend on your lender.
Securities-based loans are frequently considered as credit lines. Although they can also be considered custom loans as well. They are not usually used to provide capital or trade securities or to pay back other loans that are used to buy securities.
Securities-based loans also work faster and easily procured if you have a chockfull of acceptable securities, not to mention a profitable investment portfolio. One big plus of a securities-based loan is it is quite easy to get, granting you also have a good investment portfolio. Also, securities-based loans have lower rates compared to regular bank loans, which makes them cost-effective.
Now, here’s more. You can also use the funds that you loaned to further continue and open more financing opportunities, check out a margin loan. A margin loan will allow the borrower to loan money against his or her securities — typically up to half of the purchase prices of the investments.
The borrower can actually further use the cash to buy more securities. Of course, similar to other loans, this comes with an interest. The big difference is your ability to shift depending on your portfolio’s value. Therefore, your collateral is not fixed, it actually varies.
Here’s one thing that you need to understand in case you would like to make use of this type of loan. First off, remember this — the lender determines which among your stocks are acceptable as collateral to your loan.
What does that mean?
You need to constantly verify and look over your financial plans before putting them down on paper. Stocks or securities that are priced at $5 USD per share on any major stock exchanges in the United States of America are all ready to sail, figuratively speaking.
Because of liquidity, public stocks from public companies are also eligible forms of collateral. You have the option to use it for either a personal loan or a business loan. A stockholder may desire to obtain a huge personal loan against the public stock’s value. He or she can opt to use the loan for whatever expense they want to use it.
This type of loan is usually accessible to just the founders with notably sizable ownership in the company’s public stock. These loans are similar to loans that are directly given to the company.
And while the borrowed amounts are lower than those granted and issued to the company, they are still more significant. This particular type of loan is actually beneficial to the borrower, particularly if the money necessitated is more important than the risk.
Furthermore, the borrowers are safer as they are protected from any personal liability against payments in the future. Lending institutions have a liking for these types of loans but it only serves a very small group of people.
Now here’s the disadvantage. In the event that the borrower is not able to pay the regular loans or happens to default on the credit, the lender has the ability to take the borrowers’ company stock, which was used as collateral.
Now if your credit is significant and your shares in the company’s stock are also significant, then that could be damaging to your net worth. However, if you’re a good payer, these types of loans are very advantageous most especially if the value of your public stock increases.
Another interesting point regarding stocks as collaterals is this — you can use another person’s stocks as collaterals for your margin loan as long as the third party allows it, of course. You just need to obtain the documents from the third party, get the registered details of the available collateral and then post back the duly signed and authorized completed forms.