Borrowing money is costly now, especially if you need cash for an emergency medical expense or unplanned events such as a tax bill. But there is an alternative—a margin loan from your broker. Your broker lends you money with investments in your portfolio, such as stocks, bonds, ETFs and mutual funds, as collateral. These loans can be taken only against taxable accounts and typically are limited to half the total value of your portfolio. If you manage it properly, a margin loan doesn’t have to be high risk.
Better rates and/or faster approval: Interest rates on margin loans vary, but they compare favorably to credit cards, which have an average loan rate of 24.5%, and home-equity loans and HELOCs (about 8.6%). There are no credit checks, fees or financial disclosures to qualify, and you can get approval and access the cash usually within 24 hours. But there are a few things to know before taking a margin loan…
Borrow conservatively. If the value of your investments declines, the allowable outstanding loan balance also declines, and you could face a margin call—the broker’s demand to bring your account back within minimum requirements by adding new cash or securities as collateral…or paying off some of your loan. If you don’t, the brokerage firm can liquidate enough of your investments to bring the loan into compliance. That could saddle you with unwanted capital-gains taxes. The equity in your margin account cannot drop below 25% of the current market value of your securities.
Have a disciplined repayment plan. Margin loans are revolving lines of credit, so there are no set repayment periods or required minimum payments like credit cards and home-equity loans. But interest on margin loans continues to accumulate in your account each month until the full amount is repaid.
Consider a margin loan even if the rate is not ideal. Taking a margin loan can buy you some time to look for cheaper, longer-term solutions such as a HELOC or selling off investment assets.
