What is a line of credit? What is a securities backed line of credit?
A line of credit or LOC is a type of loan that allows borrowers access to a predetermined amount of money. When you have a LOC, you are only charged interest on the amount that you use. Lines of credit are offered by lenders such as banks, credit unions, or financial institutions.
These loans normally have qualifications required in order to borrow the money. Lines of credit provide access to flexible borrowing up to a maximum amount for a set period of time. Credit lines may be collateral loans or unsecured loans.
A securities backed line of credit is also known as a SBLOC. This is a special line of credit that is backed by a borrower’s securities, known as collateral loans. These are non-purpose short-term loans which might have higher lending limits and lower interest rates than traditional margin loans. Funds from a SBLOC cannot be used to invest in marketable securities.
Since a securities based line of credit is a revolving credit line, once you have repaid the funds that you have borrowed, they will be replenished. You can then borrow them again as long as the credit line remains open. A securities backed line of credit may be offered by brokerages, advisory firms, clearing firms, and banks. Normally, they are short-term loans that allow you to borrow money up to a set limit during a certain time period.
How does a securities based line of credit work?
Borrowers are able to use the broker’s money from a securities backed line of credit for purchases other than securities or the repayment of a margin loan. Securities-based lending or SBL loans are secured by investment securities that are held in the investor’s account at the same brokerage firm.
Interest-only payments are made monthly until the amounts that they have borrowed through the SBL short-term loans are fully repaid or until there is a margin call. A margin call may occur if the value of the account falls below the required credit line.
There is flexibility in your repayment of these types of short-term loans. You are able to repay all or part of the outstanding principal. SBLOCs are classified as demand loans that can be called in by the broker at any time.
According to Statista, the total outstanding revolving credit in the U.S. is more than $1 trillion dollars. According to the Philadelphia Federal Reserve, the total outstanding consumer debt, including debt owed on revolving credit as well as other types of debt, was more than $3.7 trillion dollars.
When taken together, these statistics demonstrate that consumers have available credit that they could access through their revolving credit lines. If they did, the total amount of outstanding debt would substantially increase.
SBLOC credit limits
SBLOC credit limits allow you to borrow from 30% to 95% of the value of the assets in your investment account, depending on the value and the types of assets in the account. They normally have certain minimum requirements on both the market value of your portfolio and the amount of your initial withdrawal.
Securities that are commonly used as collateral for a SBLOC include the following that are held in cash accounts:
- Mutual funds
The maximum credit limit can be based on the quantity and type of securities collateral that you have in your account. Access to the funds is typically provided by checks, federal funds wire, electronic funds transfer, or ACH payments-electronic payments. SBLOC funds may be available within a few business days from the date of your signed contract.
Interest rates and repayment
A securities based line of credit typically has a lower interest rate than a personal loan, bank line of credit, or a credit card. SBLOC interest rates typically follow the broker-call, the prime, or the London Interbank Offered Rate (LIBOR) plus a premium. LIBOR is a globally recognized benchmark interest rate that is used to set interest rates around the world.
Interest is calculated daily, which means that it constantly changes. It is usually charged when you receive your monthly account statement. Some firms offer a fixed SBLOC rate rather than a variable rate.
The interest expense on your SBLOC is tax deductible only if the funds are used to purchase investments which generate taxable net investment income. The potential tax benefits can be realized by circumventing potential capital gains.
If you sell securities in your investment account to access the money, you will be assessed capital gains taxes. When you instead use a securities backed line of credit, your securities will serve as collateral for the money that you borrow. However, since the securities are not sold, you will not have to pay any capital gains tax.
Benefits and limitations
There are several benefits to getting a securities based line of credit. It allows you to hold onto your investments. Since you can retain your investments, you may benefit from dividends, interest and appreciation.
An SBL loan also provides you with accessibility to cash when you need it. These loans also offer lower rates of interest than other loans along with flexibility in your repayment.
There are also a few limitations to a securities backed line of credit. You may be subject to a maintenance call, which is a demand for you to deposit additional collateral or to repay the loan within a specified period of time. If you are unable to do so, the firm can liquidate your securities to satisfy the call.
Since stocks are volatile, it can make them a risky choice to use as collateral for a loan. This is because if the market falls, the stock value may also fall, which would mean a decreased value of the collateral and the potential for a margin call.
Finally, these types of loans have a variable interest rate, which can change over time. If the interest rate goes up, your payments will also increase.
Opening a SBLOC
Before you open a securities based line of credit, make certain that you read the terms of your agreement and the impact on your holdings, taxes, the maintenance call requirements and other fees that you might have to pay. Regulation U outlines specific mandates for lenders, other than securities brokers and dealers, that extend credit secured by margin stock. Regulation U (also called Reg U) requires financial institutions to disclose whether a loan is a non-purpose or purpose loan.
Non-purpose loan borrowers are required to complete a compliance form outlining the terms of the loan and its obligations. You also need to make certain that you know who the contact for the loan is. Some firms service the loan through a third-party lending institution.
Make certain that you diversify your portfolio. If your portfolio is primarily comprised of investments in a particular sector or stock, a single market event could cause your portfolio value to fall and trigger a maintenance call. If your portfolio is well-diversified across multiple sectors and different stocks, a market event is less likely to cause a substantial drop in the value of your portfolio, which means that you are less likely to have your securities based line of credit balance called in.
You should understand the potential tax consequences of a securities backed line of credit. If the value of your investments that are securing the loan fall below the specified level, you may have a margin call. If your securities are then liquidated to maintain the required level of collateral, you could have to pay capital gains taxes from these sales.
SBLOCs are primarily used for short periods of time when you need large amounts of cash. If you use them wisely and make certain that your portfolio is well-diversified, you can enjoy a lower interest rate and greater flexibility in your repayment schedule.
In addition to a SBLOC, another type of revolving credit that you can use for any purpose is a loan against your securities from M1 Borrow. This is a revolving line of credit that is secured by the investments that you have in your taxable account as long as you have the minimum amount deposited in the account.
Borrow on your terms with M1 Borrow and M1 Finance
M1 Borrow offers a straightforward, simple and low-cost way for you to borrow money. It is a flexible portfolio credit line that allows you to borrow up to 35% of the value of your portfolio. You can then pay back what you borrow on the schedule that you determine at a low rate of interest.
The uses of the money that you borrow are flexible. You can use the funds to make major purchases, add leverage to your portfolio, refinance your existing debt, or to pay down your expensive date. You can also use the money to pay for your emergency needs. A loan from M1 Borrow has more tax deductibility than most home equity lines of credit.
M1 Borrow allows you to instantly access the money that you need. You will not have to undergo a credit check, fill out paperwork, or work with a loan officer. You will not be denied for a demand loan as long as you have a taxable investment account and a minimum balance of at least $10,000.
As long as your taxable accounts have balances that exceed $10,000, they will be automatically signed up for M1 Borrow to allow you to borrow money when you need it. You will not have to use the credit line, but it will be available if you need access to funds.
M1 Borrow allows you to avoid traditional obstacles to getting a loan and provides you with easy access to money at a lower rate of interest than most other types of loans. The current interest rate for borrowing money from M1 Borrow is 3.50%, and you are able to borrow on your own terms.
Access more with M1
When you open an investment account with M1 Finance, you can choose your own stocks and other securities to create an individualized and diversified portfolio. As an alternative, we have created more than 80 different portfolios to meet the needs of different time horizons, risk tolerance levels and objectives from which you can select.
We have designed the investment platform in a way that makes it easier and more straightforward for everyone to invest. You can benefit from its automation from anywhere.
When you choose M1 Finance for your investment accounts, you will benefit by not having to pay any management fees or commissions. We do not charge these types of fees. This means that your money can grow substantially more over time.
The platform also gives you the benefit of time savings. M1 uses automatic reinvestment and dynamic rebalancing. These tools automatically help your portfolio to achieve your financial objectives. This allows you to potentially build your wealth with less effort.
Access the money you need while paying one of the lowest rates of interest available today by signing up now or to learn more about opening an investment account and using M1 Borrow, call us today at 312-600-2883.