Securities-backed loans can be helpful for large transactions that happen from time to time such as purchasing a vacation home, remodeling a kitchen, or covering wedding expenses.

Securities-backed loans can be helpful for large transactions that happen from time to time such as purchasing a vacation home, remodeling a kitchen, or covering wedding expenses.

A securities-backed loan, also known as a non-purpose loan, is a line of credit collateralized by an investor’s portfolio of eligible securities such as stocks and bonds. The borrower deposits securities into an account on which the lender has a lien, and in turn the lender will make available a line of credit ranging, for example, from 35 percent to 60 percent of the securities’ market value.

The exact loan amount depends upon the specific underlying assets in the portfolio and the level of diversification in the account. For example, lenders typically approve more funding against a diversified portfolio rather than a portfolio that holds a single concentrated equity position.

Advantages for investors

Securities-backed loans have many advantages:
1. They offer access to liquidity without disrupting your investment strategy, allowing you to take advantage of short-term liquidity without the need to sell any of your securities.
2. By avoiding selling your securities, you do not have to pay capital gains taxes that would have been incurred if your securities were sold in order to raise cash.
3. The interest rate on a securities-backed loan is typically based on a premium of the Federal Funds lending rate. This rate varies, but is typically lower for larger relationships.

Uses for securities-backed loans

These lines of credit can be used for a variety of purposes. The most common uses include:

  • Tax payments
  • Real estate transactions
  • Home renovation
  • Luxury purchases
  • Business opportunities to cover cash flow needs

Securities-backed lines of credit are frequently used as a bridge for financing when there is a lag in the purchase of a new property and sale of an existing property.

A non-purpose securities-backed loan cannot be used to purchase or trade securities, or to repay margin loans or any other type of loan that was used for securities purchases.

Risks for securities-backed loans

Despite their many advantages, securities-backed loans, like any type of borrowing, come with certain risks. A difficult economic environment could result in a decrease in a portfolio’s value. If the value of the pledged securities falls below collateral minimums, you may be asked to deposit additional cash or securities. If additional deposits are not available, a portion of the borrower’s pledged securities may need to be sold to meet the collateral minimum. When securities are sold, it may trigger potential tax consequences.

Working with Janney 

Depending on your financial needs and personal preferences, you may opt to engage in a brokerage relationship, an advisory relationship or a combination of both. Each time you open an account, we will make recommendations on which type of relationship is in your best interest based on the information you provide when you complete or update your client profile. 

When you engage in an advisory relationship, you will pay an asset-based fee which encompasses, among other things, a defined investment strategy, ongoing monitoring, and performance reporting. Your Financial Advisor will serve in a fiduciary capacity for your advisory accounts. For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

By establishing a relationship with a Janney Financial Advisor, we can build a tailored financial plan and make recommendations about solutions that are aligned with your best interest and unique needs, goals, and preferences.
Contact us today to discuss how we can put a plan in place designed to help you reach your financial goals.

This is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed within.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

 

 

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Jeff Bowers

Marketing Analytics Manager

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For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

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