Have you recently taken out a loan or planning on taking one out?
If you haven't heard of securities backed loans then this might be another option for you to consider. In recent years securities backed loans have been gaining more popularity because of their flexibility compared to traditional loans.
Keep reading to learn some facts about these types of loans.
Facts About Securities Backed Loans
Securities backed loans help people that are making a large purchase like real estate or to buy private operating companies.
Instead of brokerages lending you securities to short sell the assets the securities are used as collateral to secure the loan. This way the investor is covered by the securities if you default on the loan.
Learning how stock loans work will help you make an informed decision on how to move forward and if it's the best loan for your situation.
Collateral
As we mentioned above the securities are used as collateral in a securities backed loan. The person that is borrowing the money deposits the securities they are putting up as collateral into an account that lists the lender as a lienholder.
Depending on the type of security you are using the lender will determine the amount they will lend you.
In most cases, the borrower is able to have the cash in hand within a few days. This type of loan requires less paperwork than a traditional loan making the process a little easier, faster, and smoother.
Benefits
One of the biggest benefits to the borrower is that they don't have to sell their securities. As long as they don't default on their loan they will have all of their securities back after the loan repayment is completed.
Another benefit is that the interest rates are lower than taking out a second mortgage or a home equity line of credit. On top of the interest rate being lower, you won't be putting your house at risk if you end up in a bad situation and default on your loan.
Plus the turn around time for a home equity loan can take between 30 to 60 days. This is a much longer turn around time compared to a securities backed loan.
As a borrower, you can also expect to have up to a 95% margin on the amount you are lent. A lender will lend you money based on the value of the assets you are using as collateral. With traditional loans, banks limit the amount they are willing to lend because of the lack of securities in a worst-case scenario.
This type of loan also benefits the lender. It gives the lender an additional income stream without much risk. If the borrower were to default the lender still has the securities to fall back on.
Risks
Like with everything else there are always risks involved. Although as you saw above there are many win-win benefits to both the lender and borrowers there are also risks involved.
One major risk worth mentioning is that securities are not tracked by the Securities and Exchange Commission (SEC). This means that you have to be careful with who you are dealing with when taking out your loan and putting your securities up as collateral. As a lender, you have to be careful that you are getting real securities put up as collateral.
Another risk that you have as a borrow is if the stock you're using as collateral starts taking a big hit and the lender decides they no longer want your securities as collateral. This will involve you having to sell your current stocks and investing in something they would rather have or pay off your loan earlier than expected.
Restrictions
Securities backed loans also come with two restrictions to mitigate more risks. The borrower is not allowed to use the money they are being lent to invest in other securities. The borrower is also not allowed to use the money they receive on loan to pay down any margin debt.
Your Lender
When you are preparing to take out your securities backed loan make sure you are well aware of who is lending you the money. You want to know ahead of time who you are doing business with. Be clear if it's an advisory firm, a brokerage, a clearing firm, or a third-party institution.
This will make it easy for you to figure out who your point of contact is. Keep in mind that many brokerage firms that offer these types of loans do it through a bank affiliate. If this was the case for you then your broker would not be your main point of contact.
Bottom line - know who to contact with any questions before agreeing to anything.
Technology Improvement
Thanks to technology lenders and borrowers are able to keep track of how their securities are doing in real-time. Only about a decade ago banks were accepting paper statements once a month to monitor how the securities were doing. You can only imagine the delay in knowing if the collateral was still worth it or not.
Nowadays everyone is able to know if the market is in their favor or not. Making it less risky if the securities take a sudden plunge. The lender is able to get ahead of the risk faster than before.
Ready to Take out a Loan?
As you can see there are many interesting facts about securities backed loans. Now that you have the information and facts about this type of loan you can make an informed decision if this is the best route for you.
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