Securities-Based Lines of Credit – Everything You Should Know
The Securities-Based Lines of Credit (SBLOC) helps one when he or she needs money urgently. Such monetary need may arise out of meeting some sudden expenses that were not expected. Such unexpected cash needs can be effectively met by the SBLOC.
Usually, the SBLOC is resorted to when a person finds his savings amount is not enough to meet the sudden or unexpected expenses that go higher than the savings amount. It may happen that you cannot mobilize other resources to mop up funds to meet this expense.
On the other hand, the SBLOC allows you to avail money quickly to meet the immediate liability.
What is a Securities-based Line of Credit?
To explain this plainly, the SBLOC means arranging a credit/loan by pledging one’s existing investments in the stock market, ETFs, and mutual funds as collateral. A borrower can avail immediate loan of up to 60% (maybe more varying from one lending agency to the other) to meet exigencies of urgent needs. One can also avail of SBLOC to purchase a house/property. It may be utilized for other purposes but not to buy shares or securities. One of the special features of SBLOC loans is that they can be very much helpful to the business community. It is a major hedge against unforeseen financial needs that may arise out of business-related financial needs or personal requirements of cash like buying a property.
Benefits of a securities-based line of credit
There are some benefits of availing of SBLOC. To exemplify, the collateral in the form of securities or fixed deposits can be reinvested even after availing of the loans (with due intimation to the lending company).
The reinvestments made in the stock market can grow even after pledging them to the bank. This growth in stock value can be attributed to the periodical rise in share prices.
There are other benefits of SBLOC also as follows:
i. It is easy to avail as the approval process is quick.
ii. Money can be received in a very short span of time.
iii. Liquidity crunch problem can be solved easily.
iv. You don’t have to sell your securities but get money from an alternative source to meet immediate financial needs.
v. Repayment schedule is customer friendly.
vi. Interest on this borrowing is comparatively lower than other forms of loans.
How does securities-based lending work?
The working process of securities-based loans is quite customer-friendly. The SBLOC loans work in the following patterns:
i. It is a collateral-based loan. The collaterals can be your securities, shares, or fixed deposits with banks or lending corporations.
ii. Right to fix the amount of loan lies with you. Here, a customer of SBLOC loans can borrow exactly the amount he or she needs. Thus, there is no need to borrow over and above the requirement.
iii. You pay less quantum of interest on SBLOC if your collateral amount is quite high. This can happen when your investment portfolio includes some prime or blue-chip shares whose price appreciates, in usual circumstances.
iv. High net-worth people stand to benefit from this type of loan.
v. SBLOC-working process involves the system of you can use loan amount, pay off and again use the loan.
Why use a securities-based line of credit?
There are certain reasons why one should use SBLOC loans. These reasons are:
i. Such loans permit a person to go ahead with different plans of investment without the need to exhaust their securities or bonds.
ii. An investment portfolio built by a person over the years need not be disturbed to avail of such loans. Your portfolio remains as it is over a long period unless otherwise, you want to disturb them.
iii. SBLOC is considered one of the safest backup financial plans.
iv. Repayment process has the element of flexibility that gives enough breathing time to a borrower.
Things to know about the securities-based line of credit
There are certain things that you must know about the SBLOC. The main points are given below:
1. Secured by non-retirement investment assets
All SBLOC loans are secured by non-retirement investment assets. In other words, your pension fund or other financial provisions meant for your retired life, cannot be pledged as security to avail of SBLOC loans.
2. Borrowers can repay and re-borrow on their own schedule
It must be kept in mind that those taking loans under the provision of SBLOC have the benefit to enjoy the system of flexibility in the repayment process and also re-borrowing with a schedule set by them. Here, the banking corporation or lending agency from which you are availing of the SBLOC has no role to play or has any tag attached to such loans.
3. The interest rate fluctuates and is tied to a benchmark
It must be mentioned that the rates for all SBLOC loans are variable and not fixed as we find in the case of most of the loans of banking or financial institutions. It may so happen that your interest rates are low now but there is no guarantee that they will remain so in near future. The interest rates may go up over a given period.
4. There are risks, particularly in a steep market tumble
The market forces or fluctuations in money markets are always tagged to the SBLOC loans. The interest rates are subjected to such fluctuations or market forces. This is a particular risk factor that the borrowers of SBLOC must know. These type of risks further goes up when turmoil grips the market and stock exchanges.
SBLOC loans are very popular. One of the primary reasons for this general propensity to avail of this type of loan is its flexibility in the repayment process and interest fluctuations. Though this interest fluctuation is directly dependent on your stock-value pledged, it usually remains on the lower side as compared to interests on other types of bank loans availed by you. In a way, this is the safest type. That is why this type of loan is known to be customer friendly.