What is a Stock Loan; How Do They Work?
The median American household has a savings account that’s only worth about $4000.00. That’s bad news because that leaves millions with limited recourse if they need to get their hands on money quickly.
Think about it… What if you desperately needed to cover medical bills or car repairs? As a less dire example, what if you wanted to launch a new business that was going to require a little bit of start-up cash?
Without adequate savings, how would you navigate those wants/needs?
Fortunately, there is an unconventional solution to all of the quandaries that we’ve just laid out. That solution is getting a stock loan.
A stock loan is a collateral-based loan that is popular among many people who have impressive portfolios but not so impressive liquid savings accounts. Below, we go over everything that you need to know in order to decide if getting a stock loan is right for you.
What Exactly is a Stock Loan?
Before we get into the ins and outs of how stock loans work, we want to make sure that you have a solid idea of what they are. So, to be crystal clear, a stock loan is a loan that lets you borrow against the value of shares that you hold in any number of publicly traded companies.
In that way, stock loans aren’t much different than car title loans.
A lender holds onto your stock portfolio, lends you an amount of money that’s in line with your portfolio’s worth and when you pay your lender back, they hand back the rights to your stocks.
Why Do People Pursue Stock Loans?
Given a stock loan’s unique nature, many people find themselves asking why it is that people choose to pursue this loan type in the first place. There are a couple of good reasons why this loan product might be a good fit for a borrower:
Borrowers Lack Liquid Assets
Stock loans are perfect for borrowers that don’t have cash but do have a high net-worth.
Non-liquid assets like stocks, cars, and property all have cash value. Stock loans and similar collateral loan products allow borrowers to temporarily convert solid assets to liquid for the purposes of paying expenses that need immediate attention.
You Can Pull Money From Your Stocks Without Short Selling
If borrowers need money from their stocks, wouldn’t it make more sense to sell them rather than borrow against them?
Not always.
If borrowers need cash and their portfolio has experienced a recent decline, it’s better to borrow against a stock’s value than to short-sell them and not be able to regain value when the market begins rising.
How Much Money Can You Get on a Stock Loan
The amount of money that a stock loan can afford a borrower is virtually unlimited. Depending on how much money your lender is allowed to loan out, how many stocks you’re parlaying and the value of those stocks, your loan amount will go up or down.
It’s important to note that lenders will not give you the full value of your stocks as a loan. In order to hedge their risks, lenders tend to only give borrowers a small fraction of their portfolio’s worth as a loan.
What Should You Watch Out for With Stock Loans
Borrowers will want to learn more and take proper precautions prior to parting with their portfolio. Some primary considerations to keep in mind are the following:
Always Do Business With a Reputable Company
The internet has enabled borrowers to access a wide array of lenders online. While this is a good thing from the perspective of having options, it’s also a bad thing in that bad companies now have a platform.
Never give away your stock portfolio to a lender that you don’t know a lot about and/or one that doesn’t have a superb track record.
Doing so could result in the theft of your assets.
Know the Terms and Conditions Surrounding Your Loan
All loans come with terms and conditions. These tenants outline things like your loan’s interest rate and fees that you’ll have to pay over your loan’s lifespan.
The better acquainted you are with all of your loan’s implications, the less chance you’ll have of being surprised by something.
Understand What You Stand to Lose
Collateral-based loans are never in favor of the borrowers.
If you pay your loan back, your lender gets to collect interest off of you. If you don’t pay your loan back, your lender gets to keep your collateral (in this case your stock portfolio) that’s worth more than they lent you.
That creates a situation where your lender never really loses.
Be aware of the arrangement that you’re getting into and never risk assets that you can’t afford to lose.
Wrapping Up Our “What is a Stock Loan” Write-Up
Now that you know what a stock loan is and how they work, if you’re still interested in getting one, find a reputable lender and see what they’re willing to offer on your portfolio.
There are a lot of different lenders out there, all of which will have slightly different products to offer. Shop around, find the best deal, and get your hands on the money that you need, fast!
Personal finance is hard. Our team at Stapler Confessions aims to make it easier. To start getting your financial world in order, check out our free eBook on the subject, now!
