Can I Secure a Loan With Stock?

Can I Secure a Loan With Stock?

Can I Secure a Loan With Stock?

It turns out that investing in stock can secure a lot more than just your financial future – it can secure your loans too. Of course, the process isn't quite as simple as moseying into any old bank with your investment portfolio and demanding cash in your account. When you borrow against the value of your stock, you get what's called a securities-based loan, which is a slightly different beast from most other loans and comes with its fair share of pros and cons.

How It Works

In short, securities-based loans (which can also use bonds or mutual funds as security) essentially unlock the value of your portfolio. Depending on the lender, you'll be able to borrow the value of between 50 and 95 percent of your assets.

Securities-based loans are often offered as lines of credit, though they can take the form of custom loans too. They typically may not be used to invest in or trade securities or to repay any other loans used to purchase securities.

If you have a lucrative portfolio or lots of eligible securities, this type of loan is often easier to obtain and more cost effective than traditional bank loans, as it typically offers lower rates.

Margin Loans

If you do plan to use the borrowed money to pursue further investment opportunities, take a look at margin loans. This type of loan allows you to borrow against your securities – usually up to 50 percent of the purchase price of your investments – and use the money to purchase more securities.

Like other loans, you'll have to pay back the amount you borrow plus interest. However, your borrowing power changes from day to day as the value of your portfolio – in this case your collateral – fluctuates.

Where to Look

Major bank lenders like Wells Fargo offer securities-based loans – sometimes dubbed "stock loans" or "stock-based loans" – and lines of credit, as do some smaller financial institutions like federal credit unions, including Baxter Credit Union and First Tech. While some banks offer margin loans, you're more likely to find this type of loan at your brokerage firm.

The Caveats

It's up to the lender to determine which of your stocks are eligible to use as collateral, so always check in before writing your financial plans down in ink. Generally, securities that sell for at least $5 per share on the major U.S. stock exchanges are good to go.

Securities-based lending can be risky and may result in failure to perform by the lender, premature sale of stock and the taxation of stock transfer by the IRS. To protect yourself, make sure the lender has audited financials on file with the Securities and Exchange Commission and is registered with a bank regulation organization such as the Financial Industry Regulatory Authority.

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About the Author

Dan's decade-long experience as a freelance writer and small business owner has seen him contribute to financial publications including Chron.com, Zacks.com, MSN Money, Fortune, Motley Fool and others.