If you are on the lookout for a short-term financing option, you may want to consider a line of credit that gives immediate access to funds up to an approved amount. And once you know the difference between a line of credit and a loan, it can become even easier for you to decide which one best fits your needs.
There are various types of lines of credit to cater to different requirements of different borrowers. Some fall under the secured category, and the rest are under unsecured. Out of all the lines of credit, a Portfolio Line of Credit is probably a lesser-known type that you should know about.
While each type of credit line has its characteristics, let us explore the basics of this article's portfolio line of credit.
What Is the Definition of a Portfolio Line of Credit?
A portfolio line of credit, also known as securities-backed lending, is a secured credit line that uses your stock portfolio as collateral. This means you can borrow funds based on the value of your portfolio containing stocks or bonds. Usually, a portfolio line of credit lender approves a loan against a certain percentage of your securities, anywhere from 50% to 95%, and uses that portion as collateral. The funds you borrow from this type of securities-based lending can be used for almost any purpose except for buying or trading securities.
Talking about repayments, a portfolio line of credit works just like any other line of credit where you can make monthly payments or choose to pay the entire balance. You might be charged extra when the value of your portfolio reduces and falls below the level of the line of credit. The best thing about this type of line of credit is that you can not only borrow funds but also keep your long-term investments in securities intact while using them as collateral.
How Does a Portfolio Line of Credit Work?
- Find a Portfolio Line of Credit Lender and inquire how to apply. You may be asked to fill out the application form with your basic information and loan requirements.
- The lender will determine your eligibility for getting the loan based on your investment portfolio or underlying assets.
- Once approved, the lender takes over your securities and becomes a lienholder. This allows the lender to seize and possibly sell your securities in case of any default in payments.
- You get ongoing access to funds up to a specific limit and period. As a portfolio line of credit borrower, you can choose to repay some or all of the outstanding loan balance.
What are the Pros & Cons of Portfolio Lines of Credit?
Pros
- The interest rate of portfolio lines of credit is comparatively lower than that of credit cards and traditional bank loans due to their secured nature.
- It offers flexible repayment terms and could provide you relaxation from making any payments when you choose not to borrow funds.
- A portfolio line of credit is a safe lending option for lenders due to the use of collateral.
- Finally, this type of line of credit can save you from paying hefty capital gain taxes if you were to dissolve some of your investments to get extra funds.
Cons
- The most significant disadvantage of a portfolio line of credit is the market's volatility. When the market goes down, the value of your portfolio might also go down. If this happens, your lender can ask you to provide additional collateral in the form of stocks, bonds, or cash.
- Like any other type of secured credit, there is a risk of losing your assets if you default on a portfolio line of credit.
How are Portfolio Lines of Credit and Personal Lines of Credit Different?
If you have a strong portfolio, you might be intrigued by the portfolio line of credit. However, knowing the difference between this securities-backed line of credit and the commonly used unsecured line of credit can help you determine what is right for you!
Factors |
Portfolio Line of Credit |
Personal Line of Credit |
| Collateral | Uses specific percentage of your portfolio's value as collateral | Doesn’t require collateral |
| Credit limit | Usually ranges from 50% to 95% of the collateral's market value | Maximum amount you are approved depends on the lender’s requirements and state where you live |
| Effect of market decline | You can be asked for additional collateral if the value of the pledged assets drops | None |
CASH 1's Line of Credit Option
A portfolio line of credit has its own set of advantages and disadvantages, but if you need continuous access to funds and don't have a portfolio, CASH 1 can help you get a line of credit. You can be approved for a credit limit of $2,500 if you reside in Utah, Idaho, Kansas, or Missouri. You can use the funds for almost anything, both for your personal and business needs.