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The Pros and Cons of Borrowing Against Your Securities
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If you need cash for a big expense—say, to build a house, start a business, or put down the entrance fee on a retirement community—you may want to consider a portfolio loan or line of credit that uses your investments as collateral.
Here are answers to some frequently asked questions about borrowing against securities so you can decide if this strategy is right for you.
How do portfolio loans and lines of credit work?
The bank uses your savings—stocks, bonds, cash, and sometimes other forms of securities—as collateral to offer you a loan or line of credit.1 These loans and lines of credit typically have variable interest rates.
How much you can borrow is up to your bank, but you may be able to access 50% of the total amount of your investments, or even more.
What are the advantages of portfolio loans and lines of credit?
There are several reasons you may want to consider portfolio loans and lines of credit. These include:
- Interest rates are generally lower than they would be with a traditional loan.
- You won't have to sell your securities to fund your project. Because you don't have to sell your securities, you won't generate capital gains2 and owe income taxes on those gains. If you're 65 or older, you also don't have to worry about being pushed into a higher income bracket where you might owe income-related surcharges on your Medicare Parts B and D.3
- Your investments will still be growing for the duration of the loan. For example, if you're earning an average of 6% on your investments and the interest rate the bank offers is 3% or even less, the math is in your favor.
- The payments may be flexible. Portfolio lines of credit typically require interest-only payments. You can repay some or all of the principal at any time, then borrow against the line again later.4 A portfolio loan may require payments of interest and principal and a set repayment period. Make sure you understand these terms and have a plan for managing the debt.
- The interest on the loan is potentially deductible. As with traditional loans and lines of credit, you may be able to use the interest on the loan as a tax deduction.5 This is generally only an option if you used the proceeds to generate taxable income. For example, if you used the loan to make improvements to a rental property, purchase business assets, or make other taxable investments. Be sure to talk to your tax advisor, because not all interest is deductible.
Tip: Consider a securities loan if the return on your investments is significantly greater than the interest you'll be charged.
What are the downsides to securities loans?
A portfolio loan or line of credit isn't right for everyone. Here are some downsides to consider:
- The bank will put a hold on your collateral. While your investment account will continue to earn interest and dividends, you may not be able to withdrawal large amounts from your collateral account without paying off your loan first. Depending on your loan amount, that could lock in a large percentage of your assets.
- If the value of your collateral declines, the lender can call the loan.6 This means you'd be asked to pay off the loan or deposit more money into the account. If you are not able to do either of these, the bank can sell your collateral without your approval.
- Securities loans are usually at a variable interest rate. While interest rates are very low right now, but they may not stay that way. If they go up, the amount you owe could be more than you expected to pay.
Keep in mind, portfolio loans don't allow you to use assets in a retirement account as collateral. For that, you should look into borrowing from your 401(k).
Securities loans can be a good deal if you have plenty of collateral that you don't need or want to sell in the near future. But be cautious. These loans aren't for everyone. Consider your individual situation before you decide. A trusted Synovus adviser can help you decide if this type of loan is right for you.
Important disclosure information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
- SEC.gov, "Investor Alert: Securities Backed Lines of Credit," updated February 6, 2017, accessed January 27, 2022. Back
- IRS.gov, "Topic No. 409 Capital Gains and Losses," updated January 11, 2022, accessed January 27, 2022. Back
- CMS.gov, "2022 Medicare Parts A & B Premiums andDeductibles/2022 Medicare Part D Income-Related Monthly AdjustmentAmounts," published November 12, 2021, accessed December 6, 2021. Back
- Ben Luthi, "What Is Securities-Based Lending?" U.S. News & World Report, published July 1, 2021, accessed February 5, 2024. Back
- Julia Kagan, "Tax Deductible Interest," Investopedia, updated April 29, 2021, accessed January 28, 2022. Back
- Tiffany Lam-Balfour, "Securities-Based Lines of Credit: What to KnowAbout SBLOCs," Nerdwallet, published December 6, 2021, accessed January 28, 2022. Back
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