Collateralized Loans 101: Helping clients work towards short-term financial needs while maintaining their long-term wealth-building strategies

By Bryan Loew, Head of Wealth Lending Sales

Seeking to maximize your wealth requires understanding of your financial goals and building strategies to work towards them. But how do you manage when your long-term financial goals are challenged by your short-term needs? In today’s competitive marketplace, securities-backed lines of credit can provide liquidity while allowing long-term investment strategies to stay on track.

What is a collateralized loan?
A collateralized or securities-based loan allows you to utilize securities, cash, and other assets in brokerage accounts as collateral to obtain variable or fixed-rate loans for almost any purpose. Borrowing against assets in an effort to preserve both wealth and wealth-building strategies may be a prudent solution for people who would like to consolidate debt, purchase or expand a business, invest in real estate, pay for luxury items, fund education or satisfy any immediate financial need without liquidating assets. These loans differ from margin loans in that they may not be used to purchase securities and typically have higher advance ratios.

Is a collateralized loan right for you?

Here are some items for consideration:

  1. Timeliness. This type of loan may be ideal for you if you are interested in obtaining short-term financing for a business venture, real estate acquisition or other high-cost transaction – particularly when time is of the essence. Because funding for large purchases and business opportunities often involves a lengthy application and approval process, collateralized lending may offer a more timely financing solution

  2. Capital gains and tax considerations. Collateralized lending may also be ideal for people who have significant investments that, if sold to meet a specific or immediate need, would trigger tax consequences and eliminate the potential for ongoing growth in the markets

  3. Time horizon and interest rate. Your long-term financial strategy, time horizon and ability to assume additional debt must be weighed against the cost of a securities-based loan. While some lenders charge variable interest two to five points above a market index, others may offer a range of terms and conditions based on the diversification and holdings of each client’s portfolio. TD Bank, for example, offers customized solutions that include both fixed and flexible terms. Lenders' rates on variable, fixed and term loans must be factored into the decision

  4. Risk tolerance. Determining your risk/reward and volatility/payback equations will be important. If the collateralized equities decrease in value below the contract threshold, borrowers may have to pay down the loan, deposit more collateral or sell holdings without recourse. Therefore, clients must consider these factors carefully when selecting holdings to use as collateral

Related investing and financial information

This article is based on information available in February 2019. It is for general informational purposes only. It is not intended to provide specific financial, investment, tax, legal, accounting, or other advice and should not be acted or relied upon without the advice of a professional advisor. A professional advisor will recommend action based on your personal circumstances and the most recent information available.

Loans are subject to credit approval. Terms and conditions apply.

Have a question? Find answers here