Benefits of a Stock-Secured Loan

A stock-secured loan uses the initial certificate of stock that you own as collateral. This collateral is held with the lender, guaranteeing the loan against default. If for some reason you do default, the lender will keep the stock as opposed to attempting to recover funds from you. This type of loan is much riskier to the borrower than an unsecured loan. However, by assuming this risk, the borrower also receives a number of benefits.

Cheaper Loans

The main advantage of using a secured loan is that it is cheaper than an unsecured loan. This is particularly true for high risk borrowers who may face very high interest rates. When the lender assumes less risk, they will not charge as much for the financing. With a stock loan, the lender has the certificate for the stock, which is typically valued much higher than the loan amount, as assurance. 

A lender only loans up to a portion of the given value of the stock they are holding on reserve. Most lenders will give between 50 and 75% depending on the type of stock and current market. They then have very little at stake in your loan. They will often extend better terms as a result, and the most common benefit in terms is lower interest rate. 

Stocks Continue Earning Interest

When your stock is being held by the bank, you do not lose any value or dividends on that stock. Instead, you are still receiving dividends as if you owned the stock. If the stock goes up in value, you have gained that equity just as if the stock was in your possession.

Because you are earning money on the stock as it is held by the bank, you can effectively subtract the funds you have earned from the cost of the loan. This will make the interest rate on your stock-secured loan even lower in actual cost to you. When you use your car to secure a loan, the car value continues to plummet in value, making the loan even more expensive. This case is the exact opposite, and you can capitalize on the cheap financing.

Use Equity without Losing Savings

You can always consider simply selling the stock in order to achieve the financing you need. However, when you do this, you trade in all the equity you had built up overtime. If you need cash immediately, a stock loan can allow you to hold on to your equity and savings while gaining immediately liquidity. 

Putting your equity to work like this will ultimately allow you to take full advantage of the investments you have made. Instead of leaving your money tied up when it is in investments, you can still put it to work, purchasing and investing further. While you should always be careful about leveraging too much of your asset base, leveraging some of your equity is a strong way to continue saving without stopping purchasing all together.



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