One of those ways is via a securities-backed line of credit (SBLOC), which is a loan product using your investments as collateral to establish a revolving line of credit with a lender. An SBLOC is similar to a home equity line of credit (HELOC), but it utilizes investments as collateral rather than a home.
The primary benefit of a securities-backed line of credit is the ability to access capital without selling investments that may have large unrealized gains, thereby avoiding (or at least delaying) a potential costly tax bill. Borrowing costs tend to be lower than other loan products because there are typically no setup or pre-payment fees, and the process to establish an SBLOC is typically quicker compared to other loan products. Additionally, an SBLOC does not impact your monthly credit reporting.
There are several drawbacks to SBLOCs that investors must consider before diving into the process. Chiefly, the interest rate used is floating, meaning that a rising interest rate environment would increase the cost of borrowing. Additionally, market volatility can lead to a decline in the value of the investments, which could cause the investments to no longer support the outstanding line of credit obligations. In this case, a maintenance call would be issued to either deposit additional assets or liquidate investments.
The process of comprehending how a securities-backed line of credit works and determining if one is suitable for your situation is complex. Working with your trusted advisor at LGT Financial Advisors will help you understand your options and determine which is best for you. Please contact your dedicated team today with any questions.