It is said that you should try to begin investing as soon as you are able to and to keep investing for as long as possible.
But there can be times when the securities aren’t enough, and you need liquidity. For those moments, stockholders can consider stock loans.
What Is a Stock Loan?
A stock loan sometimes called a non-recourse loan or securities lending, allows you to place your current stock as collateral.
For the majority of borrowers, this is a safer way to get access to the money they need. Instead of putting up items such as houses or cars as collateral, securities lending only requires borrowing against the value of the stock itself.
There are now more securities lending programs available for investors to keep what stock they have while still be able to get cash to make investments and other improvements. This liquidity is what attracts many people to these types of loans.
How much you can borrow is based on the quality and safety of your collateral loan. For example, stock holdings may give you an advance rate of 50% and U.S. Treasury bills might have a rate of 90%.
No matter the type of securities you hold, it is still true that this form of borrowing is a safer way to diversify your portfolio and keep your other investments secured.
Here are just four benefits that stock loans have for your finances.
1. No Unexpected Downturns
A major positive to get a stock loan is that the borrower is immune to unexpected downturns in their share price.
Since the borrower is only liable for the value of the collateral securities he or she will not be trapped if the stock happens to drop below the loan. This is what attracts many investors to this option and is seen as one of the greatest aspects of securities lending.
2. Benefits to Business Owners
As a business owner, it is not always feasible to make large investments. With stock loans, however, it is much more likely that business owners will be able to succeed.
These loans allow business owners to invest their money without having to sacrifice anything else.
Stock loans allow business owners to access a majority of the current value of their securities without having to relinquish ownership of their holdings.
3. Easier to Be Approved for
Compared to other forms of lending, stock loans are easier to gain approval for. This is because in the case of you defaulting on a loan, the lenders are able to sell your investments to make up for any unpaid amount. The value of your investment portfolio is all the lender will need to know if you qualify for a loan.
This form of borrowing is also a benefit to those who have investments in stock but no house, car, etc. It is a lot easier to get these loans than larger ones.
4. Does Not Only Benefit the Ultra-Wealthy
This type of borrowing is not restricted to the upper class. Average retail brokers have created mock securities-based loans to cater to the average person.
Depending on the broker, people may borrow up to 30% of their balances as long as they have at least 100,000 dollars in their taxable accounts.
This will allow even the average person to have the opportunity to better their finances.
The Bottom Line
With all of these benefits to setting your stock as collateral to future investments, it is worth taking a look at what more you can do with your money. Stock loans are a great way to make investments without losing access to your original stocks. The easy access to liquidity has been a huge factor of how popular these loans have become.