Securities loans, also known as margin loans or securities-based loans, have long been used to purchase additional securities to hypercharge returns. But you can use securities lending for a number of purposes, including purchasing real estate and expanding your business. Securities loans can be obtained by pledging your securities as collateral with securities lenders, such as investment banks or other financial institutions.
Securities lenders can offer competitive interest rates, lower then unsecured bank loans and sometimes lower than home equity loans and lines of credit. As long as you have eligible securities to pledge, the loans can be quicker and easier to obtain than other types of financing. Strictly speaking, securities loans are different from margin loans which are for stock purchase. Securities-based loans allow you to borrow more money, up to 70 percent of the value of pledged securities compared to 50 percent for margin loans. Under government regulations, securities loans cannot be used to purchase, carry or trade margin securities. Instead, they can only be used for “nonpurpose uses”.
For example:
1. Securities loans can be used for financing real estate.
2. Securities-based loans can be used for paying taxes.
3. Securities loans can be used for refinancing nonpurpose debt.
4. Securities-based loans can be used for financing business opportunities.
5. Securities loans can be used for higher education.
7. Securities-based loans can be used for buying luxury items.
Action Steps
The best contacts and resources to help you get it done
Many major banks offer securities lending services
Although not all banks offer the loans, many do offer securities loans through their brokerage departments. Like many securities lenders, they may require you to contact an investment advisor to find their rates.
I recommend: Banks offering securities-based loans, also called margin accounts, include
Wells Fargo,
Bank of America,
Wachovia, and
Citibank, which offers securities-based loans through its Smith Barney division.
Consider securities loans from large mutual funds
Full-service funds, the kind with brokers helping you trade other funds, may offer securities lending services. Rates may be advertised in terms of percentage points over a base, which changes based on economic indexes.
I recommend: Large mutual funds, such as
American Century and
Vanguard, may offer securities loans as part of their brokerage services.
Fidelity offers an effective rate of 5.25 percent for balances over $500,000. But rates increase to 8.325 percent for amounts between $500,000 and $100,000, and they rise to 10.325 percent for balances under $10,000.
Look at securities firms, such as full-service investment firms
These firms have long been in the securities lending game, but some may have higher minimum amounts than other lenders.
I recommend: Consider firms, such as
Merrill Lynch or
Morgan Stanley.
Global Stock Lending, which offers no margin calls and specializes in liquidity services for high-net worth individuals.
Discount broker investment firms typically offer securities lending
These firms advertise lower commissions in addition to a range of brokerage services, including securities lending services.
I recommend: Look at securities lending services offered by
Charles Schwab,
TD Ameritrade,
Scottrade,
TradeKing, and
Firstrade.
Securities loans for vacation properties
Real estate developers, especially vacation home and condo hotel builders, sometimes offer securities lending services to help sell their properties.
I recommend: Visit
Resinto Property or
Condo Hotel Marketplace, an online portal.
Tips & Tactics
Helpful advice for making the most of this Guide
- Rates for securities loans, typically based on the Prime rate or the London Interbank Offered Rate (LIBOR), may range from the mid-single digits for loans over $1 million to more than 10 percent for amounts under $25,000.
- An advantage of securities lending is that multiple securities owners with multiple assets can get a single loan. For instance, business partners can pledge their securities to get a loan for their business venture.
- Keep in mind that securities lenders can demand repayment at any time. Also, fixed-rate securities loans usually entail a termination or prepayment fee to pay off the loan before the end of the loan term. Securities-based loans are usually revolving lines of credit.
- Beware that securities lending carries risk. If the value of the pledged securities fall, securities lenders could ask for more securities, demand that you repay the loan, or sell your securities, possibly spoiling your investment strategy and socking you with a capital gains tax.
- Securities-based loans are best for short-term borrowing.
The official source of Securities Lending is the Securities Lending page at Business.com
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