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.