Risks of Securities-Backed Lending
For individuals with assets in brokerage firms, a new form of borrowing money is becoming increasingly popular through a process called securities-backed (or non-purpose) lending. The following is an examination of what securities-backed lending is, how it works, and some of the reasons why it is becoming more popular. In a separate post, we will examine the potential risks that this type of lending poses.Borrowing Against Your Portfolio
Securities-backed lending involves borrowing money against funds contained in brokerage accounts. The assets in the account are used as the collateral for the loan. This type of lending is often offered to individuals with millions of dollars in taxable accounts, invested in items like stocks, bonds, and mutual funds. It is becoming increasingly common for these individuals to be encouraged to borrow money against these holdings. Many brokerage firms view these loans as a preferred alternative to liquidating assets. Often, firms will call securities-backed lending something else. For example, UBS describes it as the “UBS Credit Line” and Morgan Stanley named its version the “Express CreditLine.”
Brokerage firms offer these loans at lower interest rates, usually between 2% and 5%. A person can typically borrow between 50% and 95% of the cash value they have in the account. The borrowed money can be used for just about anything, like for business purposes, purchasing art or real estate, or to refinance a loan that has a higher interest rate (such as a home mortgage). However, the money cannot be used to purchase additional securities.
There are several benefits for both the individual borrowing, as well as the brokerage firm lending, the money. Perhaps the greatest benefit is that the process to lend the money takes very little time. The firm does not need to conduct extensive due diligence related to the ability of the borrower to repay the loan. This is because the firm already holds the borrower’s assets and due to the fact that public securities are highly liquid. As a result, a firm can quickly develop a new stream of revenue, without even having to search for a new customer. Additionally, if the investor had been considering liquidating assets, the firm avoids this result by agreeing to lend the money instead.
Another benefit related to the speed at which these loans can be approved is that the loan does not need to be underwritten. Underwriting is the process of ensuring that the loan, borrower, property, and documentation meet the requirements of the lender. The speed at which money can be obtained may be attractive for an individual wishing to purchase something that is affected by time constraints or in the case of an unexpected financial emergency.For More Information
Before agreeing to borrow money secured by your investment assets, it is important to have a clear idea of what securities-backed lending is. If you would like to gain a better understanding of, or have questions related to, securities-backed lending, contact the attorneys at the Silver Law Group today.