Stock loans, also called securities backed lending, is an efficient financial way to borrow against the value of your stock holdings without selling them. Yes there are so many advantages involved. But there is another side to this as well that includes the disadvantages or cons of a stock-secured loan. In this blog post today, let us explore both pros and cons of investing with the help of a stock loan.
Pros Are More
Liquidity without selling stocks
The biggest advantage of getting into these stock-based loans is that they offer immediate liquidity without any need to sell your stock holdings. So if you are an investor who is looking for long term growth potential of their stocks, this is the best way to do so. Also you can access quick cash while still benefiting from any future appreciation or increase in the value of your stocks. This approach is more useful in cases when you are suffering from capital gains taxes while selling your stocks.
Flexible loan terms
Unlike normal loans, a loan on stocks offers you flexible terms. You are open to negotiate repayment schedules, interest rates, and loan durations depending on your financial situation. In addition to all these things, these loans also offer lower interest rates than unsecured loans. Why? Because they are secured by the collateral you submit. That’s why many people know them by the name collateral loans. So if you are a business owner who is looking for working capital or an investor needing short term liquidity, this flexibility of loan terms can be particularly beneficial for you.
No credit check or income verification
In other kinds of loans, you will be asked to submit your transaction details or verify your monthly or annual income. However in the case of these loans, there is no such thing like that. The providers of these loans are less concerned with your credit history or income. Indeed, their main focus is to provide a loan on a stock that is more attractive. This feature makes these loans more attractive for people or businesses that may not qualify for traditional loans due to poor credit or fluctuating income. Overall as long as you are holding a significant portfolio of valuable stocks, you are free to access funds without undergoing credit checks or proving your income.
Quick access to funds
With securities-backed lending, you can get quick access to money directly into your bank account. The approval processes quicker and you do not need to wait longer for enjoying liquidity. You can even receive the loan amount within days as your application is completed. So this financial tool is an excellent option for people who want immediate liquidity to cover expenses, invest in business opportunities, or handle emergencies.
Potential for future stock growth
Not only this, but you can also retain ownership of your stocks with a loan on stocks. You will continue to benefit from any appreciation or increase in the value of your stocks in future.
Don’t Skip The Cons
All the there are lots of advantages of stock loans, they come with some cons as well. Some of them are as follows:
Risk of losing stock ownership
There is the possibility that you will lose your stocks’ ownership. But in what case? Only when you won’t be able to pay the decided loan amount on time and do not respond to the margin call. You will get a margin call if the value of your stocks goes beyond a particular decided value. All you need to do is respond to that call and submit additional collateral till the time the value comes back to its original value.
Market volatility and loan margin calls
The biggest disadvantage that comes with investing in stock loans is that the market is volatile all the time. You can’t predict what will happen next in the stock market. So there are chances that your stocks’ value might go down or you might have to face some losses. Also as discussed above as well, there is a part that includes margin calls that come to you when you are not able to repay a portion of your loan. And the scales if you fail to meet margin calls you might lose your stocks.
Higher interest rates compared to traditional secured loans
If you go for any other type of loan (unsecured), they may still offer lower interest rates. But in case of stock loans, the interest rates are comparatively higher. So it is important to assess how to borrow against stock before diving into the world of share backed finance.
Conclusion
Overall, a stock secured loan comes with both advantages and disadvantages. Pros are higher as compared to the cons. And in case of all the disadvantages that come with it, you just cannot define or control the market’s volatility. However the other disadvantages involved are totally dependent upon you. So you need to be aware of paying the loan fees and every other related thing included in the terms and conditions properly.
