Do you have a versatile portfolio of stocks? Want to use them for borrowing money? Yes, you can do it today with the help of stock loan services. The borrowing against your stock holdings can also be termed as a ‘securities-backed lending/ loan’ (SBL). Although it might seem a tempting option in the beginning, there are needs and specific guidelines to apply for it. In this blog post, we will discuss how to borrow against stock in detail to make you understand the process clearly and better.
What Are Stock-Based Loans?
It’s important to understand what stock loans are exactly before understanding the process of borrowing against stocks.
An SBL allows you to earn immediate cash using your brokerage account holdings. You can use your stocks or bonds as collateral here. Yes, it’s a type of collateral loan itself. Then, the lender offers you with a particular loan amount which is generally a particular percentage of your own submitted shares as collateral. Although the percentage ranges from firm to firm, you can expect a typical amount from 50% to 80% for your stocks. The important thing is you are using your investments (stocks in this case) as the security for the loan. For a more detailed explanation of Stock Loans, refer to our blog post on what is a stock loan.
The Process of Lending with a Stock-Secured Loan
Now, let us understand the whole process of how to borrow money against your stocks below:
Step-1: Evaluate Your Needs.
Firstly, you need to be clear about your purpose and requirements for which you want to get stock loans. Consider asking the following to yourself:
Purpose of Borrowing
What is your actual purpose to get a loan on stocks? It can be to back up your current expenses or invest in an upcoming opportunity.
Cash Required
Be clear about how much cash you would need to fulfill your purpose. We will suggest borrowing only the required amount, otherwise a lot of lending might result in unfavorable conditions later on.
Investment Timeline
If you have plans for long-term investments, only then go for securities-backed lending. These loans are not that much beneficial for short-term financial goals.
Step 2: Review Brokerage Options.
As you get clear of your financial needs and investment timeline, it’s time to find the best brokerage for your situation. You can compare different entities by considering the following factors:
Loan-to-Value Ratio (LTV)
This ratio is generally the proportion of how much you can borrow against the value of your stocks as collateral.
For example: if a stock loan company is providing you 60% LTV, it means that you can access 60% of the total value of your stocks.
If you want optimal LTV ratios for stock loans, Worldwide Stock Loans can help. You can get up to 80% loan-to-value ratio with the help of stock loan services of Worldwide Stock Loans.
Interest Rates
The interest rates on a loan on stocks vary depending on the broker, your creditworthiness, and the current stock market conditions. Generally, these interest rates are higher than traditional loans but lower than credit cards.
Account Minimums
Many brokers ask for the minimum required account value to provide an SBL.
Step 3: Calculate Affordability.
Before finally going for share-backed finance, you will also need to check whether you can afford it or not. For the same, you can consider the following:
Interest Expenses
Do a proper evaluation and calculation of the total interest rates during the whole loan term. If you find it affordable, only then go for a loan.
Margin Calls
Margin calls are an important part of SBLs. Generally, the lender (who provides funds to you) has to maintain a particular LTV (loan-to-value ratio) decided in the agreement part. In case it falls below the decided level, you will get a margin call about the same. You will have to take care of the depleting margin at this time either by submitting extra cash or giving other collateral. If you fail to meet the margin call, the lender has the right to sell your stocks to cover the loan amount.
Debt Burden
If you are getting a stock-secured loan, we understand that it’s to cover up your finances. But as the loan will also add up a debt burden to you, you need to make a proper strategy on how you will repay the loan. Otherwise, it can make you stuck in a never-ending loop of debts.
How Billionaires Use Stock Loans to Avoid Capital Gain Taxes?
You have read the heading very right!
The billionaires also use stock loans but their purpose is to avoid capital gain taxes. They use a strategy called ‘buy, borrow, die.’ Have you heard of it?
In simple terms, they also borrow money using their stocks as collateral in place of selling them and getting bothered with capital gains later on.
If you want to read more about this read our blog: how billionaires utilize stock loans for avoiding capital gain taxes.
Conclusion
Overall, borrowing funds against your stocks is possible with the help of stock loan companies today. The main aim of these firms is to let you deal with your financial problems all of a sudden without burdening yourselves with selling stocks. You can consider Worldwide Stock Loans as your trusted stock loan provider in case of emergencies.