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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: funding a home improvement project buying a new car consolidating debt educational expenses business financing A portfolio line of credit can be used as a supplement to traditional borrowing options such as and 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. Pros and cons of using a portfolio line of credit
Pros
Your investments serve as collateral with your broker/lender, and as the loan is directly tied to your brokerage account, no credit checks are required. Interest rates are lower than other forms of borrowing (and may be negotiable based on total amount of assets invested with the firm). Spreads a purchase out over time, while allowing you to keep a larger portion of your investments working for you. Money is available almost immediately as the approval process is simpler. Does not trigger . No set repayment schedule, often with no minimum payments or early payment penalties. Cons
Can be subject to a high degree of risk: If the value of your portfolio falls below the minimum maintenance dollar requirement you will either need to deposit more money to pay down the loan balance or deposit additional securities. If you don’t, your broker may sell invested assets of their choosing without contacting you. This is known as a and can have significant tax implications. Required dollar amount held by broker can be increased at any time without notifying you in advance. Eliminates your ability to “shop around for the best rate” unless you are willing to leave your current broker. Interest rates are variable and can increase at any time especially when interest rates are rising. Based on market conditions, the cost of borrowing can exceed market returns. Possibility of getting “overleveraged” by borrowing too large a percentage of your portfolio value. Is a portfolio line of credit right for you
According to , 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. Alternatives to a portfolio line of credit
One alternative option is a . Things to consider when contemplating a HELOC include: Interest paid could potentially be deducted from taxes, making it an attractive option for financing home improvements. Interest rates are typically lower than those charged by credit cards and personal loans. Your is your collateral. Loans are considered second mortgages if your home is not paid off If you cannot pay your first and second mortgage, your home could be at risk of foreclosure HELOC applications take time to process because it requires a home appraisal and a review of credit history. You could also use more traditional loans as an alternative to a portfolio line of credit such as personal loans, or credit cards. Bottom line
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. SHARE: Karen Roberts is a contributing writer for Bankrate. Karen writes about saving for retirement. Bankrate reporter Brian Baker covers investing and retirement. He has previous experience as an industry analyst at an investment firm. Baker is passionate about helping people make sense of complicated financial topics so that they can plan for their financial futures. Related Articles