{"id":352705,"date":"2016-04-04T10:42:08","date_gmt":"2016-04-04T15:42:08","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/consumer\/securities-law\/what-is-securities-based-lending.html"},"modified":"2024-06-04T13:57:28","modified_gmt":"2024-06-04T18:57:28","slug":"what-is-securities-based-lending","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/consumer\/securities-law\/what-is-securities-based-lending.html","title":{"rendered":"What Is Securities-Based Lending?"},"content":{"rendered":"\n
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What Is Securities-Based Lending?<\/h1>\n
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\n By Oni Harton, J.D.<\/a> | Legally reviewed by Melissa Bender, Esq.<\/a>\n | Last updated\n
\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

Securities-based lending (SBL) or securities-based lines of credit provide access to capital using investments as collateral. Investors can use securities<\/a> in their investment portfolios as loan collateral. SBL allows quick access to liquidity without liquidating investment accounts.<\/p>\r\n

Although financial advisors and financial services firms sometimes market securities-based lending as a cost-effective lending solution when an investor needs a personal loan, it comes with several potential risks. This article discusses securities-based lending. It discusses SBL basics and what to consider before using the investment products in your brokerage accounts as collateral.<\/p>\r\n

See FindLaw’s Securities Law Basics<\/a> section for more articles and resources, including Securities Law: An Overview<\/a> and Basic Terms for Shareholders and Investors<\/a>.<\/p>\r\n

Overview of Securities-Based Lending<\/h2>\r\n

Securities-based lending is straightforward. Brokerage firms, wealth management companies, or broker-dealers loan money to existing investors. Securities-based lending generally works like a home equity line of credit.<\/p>\r\n

With a home equity line of credit, a house serves as collateral in the case of a default. With securities-based lending, securities serve as collateral<\/a> in case of default. In both cases, investors can draw funds from the line of credit, pay it down, and draw funds again.<\/p>\r\n

Collateral for the Loan<\/h3>\r\n

The financial services industry has long used collateral to secure a loan. But using stock and bonds as collateral is a relatively new investment strategy.<\/p>\r\n

Securities such as fully paid-for stocks, bonds, and mutual funds are collateral for a securities-based loan. When the markets produce positive returns, these types of loans can be a critical source of revenue for financial institutions and investment advisors.<\/p>\r\n

A Revolving Line of Credit<\/h3>\r\n

A securities-based line of credit is a revolving line of credit using securities held in investment accounts as collateral. The loan can require borrowers to make interest-only payments. It remains outstanding until repayment. The borrower can repay the principal at any time.<\/p>\r\n

Advantages of Securities-Based Lending<\/h2>\r\n

Securities-based lending has proven attractive to financial firms. Banks and brokers generally get fees for managing their clients’ investments and assets. Offering loans tied to their existing business increases revenue.<\/p>\r\n

A financial institution or broker already holds the collateral; the existing customer is a known quantity. In recent years, financial firms have made a big push to increase securities-based lending. Many firms reward employees who make them with lucrative bonuses.<\/p>\r\n

These loans can benefit borrowers just as much as lenders. Most people hold stocks, bonds, and other securities. People have retirement accounts or taxable brokerage accounts. They accumulate wealth for retirement, kids’ college tuition, real estate purchases, and other purposes.<\/p>\r\n

Securities-based lending allows investors to raise cash quickly while benefiting from a secured loan’s favorable terms and keeping the underlying stocks and bonds in a portfolio. The mixture of collateral, an existing relationship with the bank or broker, and favorable loan terms offer real value. The main question is whether these loans are suitable for you.<\/p>\r\n

Securities-backed loans offer distinct advantages, including the following.<\/p>\r\n

Cost<\/h3>\r\n

The interest rates for a securities-based loan are typically lower than the rate for a personal loan or line of credit from your bank or by using a credit card. This is a significant advantage.<\/p>\r\n

Also, some lenders may not require a credit check on credit approval for the SBL. The maximum credit may be based on the value of the collateral portfolio alone. Investors can borrow up to 50% to 95% of the asset’s value, depending on the collateral type.<\/p>\r\n

With SBLs, firms can offer lower interest rates and make larger loans. This makes securities-based lending an attractive source of cash.<\/p>\r\n

The financial institution or broker-dealer determines the limit an investor can borrow against their portfolio. It’s called the advance rate. People can’t borrow against the total value of their portfolios. Typically, the more diversification in a portfolio, the higher percentage an institution may be willing to lend.<\/p>\r\n

Flexibility<\/h3>\r\n

An investor can use a securities-based loan for a variety of purposes. They are non-purpose loans. Common uses include the following:<\/p>\r\n