Can You Use Stocks as Collateral for a Loan?

Whether you need bridge financings or short-term liquidity, using stock as collateral for a loan could offer a solution. You might already be familiar with another type of equity-based loan, a home equity line of credit or HELOC. Like HELOCs, you can use the securities in a brokerage account as collateral to meet short-term or long-term funding needs. The short answer to “Can you use stocks as collateral for a loan?” is yes. Read on to learn how to borrow against stocks and keep reading to see how you can get personalized offers from our trusted partners through MoneyLion!

What is collateral?

Collateral is any asset of value you own that can be used to secure a loan. Real estate, savings accounts, investment accounts, cars, and yes, stocks can be used as collateral. 

For an asset to be used as collateral, it must be in your name and have enough value to secure the loan. As you can imagine, lenders gain an extra layer of lending security when borrowers use collateral. 

However, borrowers may face added risks, particularly if they cannot repay the loan. When you use an asset as collateral, you give the lender the right to liquidate your asset to recover its funds if you cannot keep up with your debt obligations. Borrowing against stock portfolios comes with additional risks because the value of the collateral may drop. If it drops, you’ll likely be responsible for the difference. 

How does using stocks as collateral work?

Borrowing against stocks comes in various forms, most commonly called margin loans or security-based lines of credit. To take out a stock collateral loan, the lender will review the value of your stock portfolio and approve you for a funding amount accordingly. It typically considers additional factors, such as your credit score and income level. 

Most of the time, you’ll only be able to borrow up to 50% to 70% of the value of your stock portfolio, depending on the type of stock-collateral loan. If you have $10,000 in stocks, for example, most lenders won’t approve you for a loan worth more than $5,000 to $6,000 if you choose a securities-based line of credit. However, exceptions exist in certain cases. 

Once the lender approves you for the loan, you’ll receive the lump sum amount and make payments according to the agreed terms. In other cases where you want to take out a stock collateral loan, you’ll need to transfer ownership to the lender, who will own the stocks during the life of your loan. 

A loan with stock as collateral is known as a security-based loan, a stock-based loan, or a stock collateral loan. 

How to get a loan using stocks as collateral?

Using stock as collateral for a loan can mean several different things. Here are the two most common scenarios.  

1. Margin

Just as a bank can allow you to borrow money against your home with a home equity line of credit, a brokerage company can allow you to borrow funds against the value of assets in your portfolio. You can use margins to borrow the value of eligible stocks, bonds, exchange-traded funds, and mutual funds in your portfolio. 

According to Schwab.com, you’ll usually need a minimum of $2,000 in the account in cash or marginable securities, which are limited to 50% of the investments’ value. This strategy is used by many professional investors to effectively own more stock without having to pay for all of it. 

Funds used for margin loans are used for short-term liquidity needs or to make additional investments. If the stocks increase in value, investors can repay their debt and keep some for themselves. Unfortunately, this strategy comes with significant risk, and the potential for loss can be great if your portfolio decreases in value or you’re forced to pay appreciated securities to meet the repayment requirements.  

2. Security-based lines of credit

A bank offers a security-based line of credit. It functions similarly to margins, except that the bank is the lender. Unlike margin, a security-based line of credit may not be used to purchase securities or pay down margin loans. They also cannot be used to fund a brokerage account. 

You can use a security-based line of credit for bridge financing or liquidity needs. In the case of bridge financing, you could use a security-based line of credit to buy a new home before your other property sells. Or, when you need quick access to cash but don’t want to sell your investments, a securities-based line of credit could be a solution.  

Assets are pledged as collateral and held in a separate brokerage account at a broker-dealer. Securities-based lines of credit also come with additional risk. If the market value of the pledged collateral decreases, the bank may demand immediate repayment or require an additional deposit of cash or securities to avoid the sale of pledged assets. You can reduce this risk by pledging diversified assets, but you’ll still need to watch the value of your pledged assets and have backup funds in the event of a demand.

Securities-based lines of credit also tend to require more borrowing than a margin account or may require a larger initial advance. While minimum requirements vary, lenders often require a $100,000 or more minimum loan value as collateral. You may be able to borrow up to 70% of the securities market value. After the high initial advance, you can use the line of credit for smaller liquidity needs. You’ll only need to pay interest on the borrowed amount. 

Pros and cons of using stocks as collateral 

Like most financing options, using stocks as collateral has pros and cons. Compare these choices to understand whether a stock collateral loan is a good solution for you. 

Advantages

• With the collateral, you’ll have improved chances of getting approved for a loan
• Options to leverage funds to invest more
• Bridge options for fast funding when you need it
• Potentially increase loan amounts based on the equity you have built up
• In the case of security-based lines of credit, you can use funds for whatever you need 
• Allows you to keep a larger portion of your investments working for you
• The money may be available almost immediately 
• The borrowing does not trigger capital gains tax
• In the case of a portfolio line of credit, there usually isn’t a set repayment schedule, and usually won’t have any minimum payment or early payment penalties
• You may be able to write off your interest costs as an investment expense if you itemize your expenses in tax filings

Disadvantages

• For margins, you’ll usually only receive 50% of the full value of your portfolio. 
• For security-based lines of credit, Since the value of your assets could fluctuate, you could owe more money than you’ve borrowed. 
• If you cannot make loan payments, your lender can liquidate your stock to recover its funds. 
• The broker may raise the minimum required equity for a line of credit without informing you.
• Because your assets are with one institution, you cannot shop around for the best rate unless you are willing to leave your current broker.
• Interest rates are usually variable and can increase at any time.
• Higher risk due to the possibility of your portfolio value falling at any time. 

Other assets you can use to secure a loan

You can take a loan against a stock portfolio, but stocks aren’t the only assets that can be used to secure a loan. Other options include a home, boat, car, retirement account, artwork, and more. As long as the assets are in your name and hold enough value to cover the loan, they can be used as collateral.

What to know before you borrow against a stock portfolio

Before borrowing against a stock portfolio, consider your financial needs, portfolio diversification, available interest rates for loans, and more. Here are key questions to ask before using stocks as collateral for a loan:

1. How much are you borrowing? 

Also known as the loan’s funding amount, this represents the amount the lender will grant you and the amount you’ll need to pay back, plus interest. Depending on the value of your stock portfolio, your credit score, and your income levels, you may be approved for a higher funding amount than you actually need. Ideally, you want to borrow only as much as you need or as much as you can reasonably pay back.  

2. What is the APR? 

The Annual Percentage Rate (APR) represents the overall yearly cost of a loan, shown as a percentage of the funding amount. APRs take into account interest rates and other loan-related fees. You can speak with the lender to understand the best available APRs. 

3. Are there any penalties for early repayment? 

Some lenders impose penalties or fines for late payments. You may also be charged a prepayment penalty if you pay your loan off early. It’s a good idea to determine if any of these clauses exist so you can avoid them or negotiate them down if at all possible. 

4. How much are the monthly payments? 

Your monthly payments will consist of your principal and interest over the loan term. Your principal is part of your total borrowed amount, and each month you make your payment, paying down the principal amount gets you closer to paying the loan off. 

5. What happens to your collateral if you can’t repay the loan? 

If you can’t repay your loan, the lender can recover the funds by selling your collateral. However, the exact repercussions depend on whether you have margins or security-based lines of credit. In either case, your broker may sell investments without contacting you if the investment is offered as collateral in an escrow account.

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MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

*These personal loan offers do not use stocks as collateral.

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Should you borrow against a stock portfolio?

Choosing to use stocks as collateral for a loan requires careful consideration. You may be able to leverage your assets to your advantage, but it depends on your unique financial situation and goals. Before you borrow against a stock portfolio, carefully consider why you need the funds and if you are willing to risk losing your stock if you can’t make your loan payments.  

Nevertheless, using stocks as collateral for a loan can be a great way to access more liquidity. The approval process may be quicker when you use stock as collateral, and you may even qualify for a lower interest rate (although that’s not guaranteed). The bottom line: your investment portfolio may give you the resources to access credit when needed. 

You can learn more about leveraging debt to build wealth or consider personal loans for certain liquidity needs. You can also consider side hustles to get money fast or build a new income stream. 

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