A pledged asset line or portfolio line of credit allows you to borrow against the value of your investment portfolio, typically at a low rate.
Wouldn’t it be nice if you could make better use of money tied up in your investment portfolio? Maybe for an emergency or to pay down a high-interest credit card?
After all, the money is sitting there waiting for investments to appreciate or collecting dividends.
But to access that capital, you’ll have to close out of your investments. That’s basically your only option. Closing out of your investments, depending on what they are valued at, could mean realizing a loss or a short-term gain — and the tax consequences that go along with it.
However, there are better alternatives. It’s called using a margin loan, or using margin to access a portfolio line of credit.
Our favorite brokerage for a portfolio line of credit is Interactive Brokers. Interactive Brokers allows you to borrow against your investments without closing your positions (as do some other firms). Sure, you could take out a traditional loan or use other lending alternatives. But using a portfolio line of credit can be smart due to the low interest rates.
See the typical interest rates of the alternatives:
- Credit Cards: 22.93% APR
- Student Loan: 7.05% APR
- HELOC: 8.5% APR
- Auto Loan: 7.1% to 11.30% APR
- Mortgage: 7.50% APR
With IBKR, you can borrow against your portfolio for as low as 4.390% APR. That’s compelling — so let’s look at what using a portfolio line of credit looks like, why you would want to, and how to do it.
What Is a Margin Portfolio Line of Credit
A portfolio line of credit is a type of margin loan that lets investors borrow against their stock portfolio at a low interest rate. The loan is collateralized by your stock positions.
With that money, you can use your line of credit to pay for almost anything — from home improvement to paying down other debt and more.
If you have a large amount of money tied up in your portfolio (perhaps through your own investing, or because you received stock as part of an IPO), you may not want to sell your positions if you need cash. That’s where the portfolio line of credit comes in. You can simply borrow against your positions without having to sell.
Furthermore, by not selling your positions, you can also avoid capital gains taxes — which, if you have highly appreciated stock, can be significant.
You are allowed to borrow up to 50% to purchase securities, and each broker has different levels for borrowing cash. For example, M1 Finance allows you to borrow up to 35% of your portfolio as a portfolio line of credit. There is also no set repayment period. Your loan accrues interest, but you can pay it back anytime — either through a cash deposit or by selling some securities and using that cash.
What Are the Risks of Borrowing From Your Portfolio
It’s important to realize that there are risks involved in a margin loan — just like any other type of debt.
There are three main risks when it comes to a margin loan or portfolio line of credit.
First, if you use the money to invest, you could lose the money, and as a result, your losses are magnified.
Second, interest rates on the loan could change. Rates could rise in the future, though they could also decrease, which would be a small win.
Third, you could be subject to a maintenance call. If your portfolio value declines, your account can trigger a maintenance call and you either have to deposit new cash or sell a portion of your portfolio to cover the loan. While you’ll usually be notified of the need to deposit extra money, if your portfolio experiences significant losses, the brokerage may sell your stocks automatically to cover the loan due to being legally required to do so.
What Are the Best Use Cases
There are a few use cases where using a portfolio line of credit makes a lot of sense. These use cases assume you have a solid portfolio position — likely at least $100,000 or more — and that most of the portfolio consists of highly appreciated stocks you don’t want to sell.
This also works under the assumption that you can afford to service the loan regardless of whether it is a margin loan.
Debt Consolidation: If you have other debt such as credit cards, it could make a lot of sense to consolidate into a margin loan. You would likely save significant amounts in interest, since the best margin loans are at 6% or less while credit cards carry double-digit rates.
Auto Financing: If you need to purchase a new car, using a margin loan could make sense. The rates are likely lower than what you could get for a standard auto loan.
Home Improvement: If you’re looking to do a renovation or addition, it could make sense to use a portfolio line of credit instead of a HELOC — especially if you don’t have enough equity in your home to justify a HELOC.
Using a margin loan to purchase more stocks is generally not recommended. Yes, it can magnify your returns, but it can also magnify your losses — and that can be financially damaging.
Where to Find the Best Margin Loans
Most major stock brokers offer margin loans or portfolio lines of credit. The two most competitive options are outlined below.
Robinhood
Robinhood has launched a competitive margin product with some of the lowest rates currently available. When combined with their bonus incentives for bringing assets to the platform, Robinhood has a compelling offer for borrowers.
Interactive Brokers (IBKR)
Interactive Brokers is a platform geared toward higher net worth and more active traders. In addition to a solid trading platform, IBKR is known for its highly competitive margin loans and portfolio lines of credit — typically better than most large or traditional brokerage firms.
The minimum floor on IBKR loans is 4.120%, but most loans will see rates around 5.120%, depending on the balance and amount of assets held at the firm. The lowest currently advertised rate of 4.120% applies to accounts with over $50,000,000 in assets. However, even having $100,000 or less can qualify you for 5.120% (or the benchmark rate plus 2.50%).
The great thing about IBKR is that you don’t have to negotiate or fight for a great rate — simply deposit the assets and borrow. This is unlike Fidelity or Schwab, where a great rate is sometimes available but requires negotiation and approval.
Open an account at Interactive Brokers
Pledged Asset Line Rates
M1 Finance and IBKR consistently compete for the lowest rates, and Robinhood is also in contention.
Remember, portfolio loan rates are closely tied to the federal funds rate. As it rises and falls, so will the loan rates posted by these brokerages.
Is Using a Portfolio Line of Credit Worth It?
If you believe that borrowing against your investments is something you need, then a low-rate option like M1 Finance or IBKR can be a good deal. It can be a better option than a credit card, auto loan, or HELOC, and it offers several benefits from a tax perspective.
Just be careful not to push your brokerage account into a maintenance call, as that can result in your holdings being liquidated to satisfy the call — which would not only be disruptive but potentially very costly.
