Borrowing Against Your Assets: 3 Options to Understand Before Using Collateral

Debt is often viewed negatively, but borrowing is not always a bad financial decision. When used carefully, debt can help support short-term liquidity needs, bridge timing gaps or fund major expenses without disrupting a long-term investment plan.

For individuals who have built wealth through investment accounts, real estate or other assets, borrowing options may extend beyond traditional credit cards or personal loans. In some cases, those assets can be used as collateral to secure a loan or line of credit.

However, asset-backed borrowing should be approached thoughtfully. Using investments or home equity as collateral can create meaningful risk if markets decline, interest rates rise or your ability to repay changes. The right strategy depends on your goals, cash flow, risk tolerance and comfort with debt.

Here are three common ways individuals may borrow against their assets — and what to consider before doing so.

1. Margin Loans

A margin loan allows you to borrow against eligible securities held in a brokerage account, such as certain stocks, bonds, mutual funds or exchange-traded funds. The amount you can borrow is typically based on the value of the eligible investments in the account.

Margin can be convenient because it may provide quick access to liquidity without a lengthy loan application. However, it also introduces leverage, which can amplify both gains and losses. Under federal margin rules, investors may generally borrow up to 50% of the purchase price of eligible securities, and maintenance requirements apply after the loan is established. If the account value falls below required levels, the brokerage firm may issue a margin call and require you to deposit more cash, add securities or sell investments.

When margin may be considered

Short-term liquidity needs
 Margin may be used as a temporary source of funds for short-term expenses, such as covering a tax bill or managing an unexpected cash need. The key word is temporary. Borrowing too much, or holding a margin balance for too long, can increase the risk of a margin call if the portfolio declines.

Investment flexibility
 Some investors use margin to take advantage of an investment opportunity before cash is available. This can be risky because losses are magnified when borrowed funds are used to invest. It is generally most appropriate for experienced investors who understand leverage and have the financial capacity to respond if markets move against them.

Tax considerations
 In certain situations, margin interest may be deductible if the borrowed funds are used to purchase taxable investments and the taxpayer itemizes deductions. This is highly situation-specific, so it is important to consult a tax professional.

Important consideration

Diversification matters. If a margin account is heavily concentrated in one investment, a sharp decline in that position could quickly trigger a margin call. Borrowing conservatively and maintaining additional liquidity can help reduce the risk of being forced to sell investments at an unfavorable time.

2. Securities-Based Lines of Credit

A securities-based line of credit, sometimes called an SBLOC, allows you to borrow against eligible investments without selling them. These lines are typically issued through a bank or lender, with investment assets pledged as collateral.

Unlike margin, an SBLOC generally cannot be used to purchase securities or repay margin debt. Instead, the funds are often used for liquidity needs, tax payments, bridge financing or large planned expenses.

Because the loan is secured by investment assets, interest rates may be lower than unsecured borrowing options. But the risk is similar to margin in one important way: if the value of the pledged investments declines, the lender may require additional collateral, partial repayment or liquidation of assets.

When an SBLOC may be considered

Liquidity or cash flow timing
 An SBLOC may help individuals with uneven income or timing gaps between major transactions. For example, a business owner might use it to manage seasonal cash flow, or a homeowner might use it to bridge the purchase of a new home before selling an existing one.

Avoiding an immediate sale of investments
 Borrowing against investments may allow you to access cash while keeping your portfolio invested. This may help avoid selling assets at an unfavorable time or triggering capital gains taxes. However, this should be weighed carefully against interest costs, market risk and repayment ability.

Large expenses or tax payments
 An SBLOC may be used to cover a significant expense, such as a tax obligation, without liquidating investments. This can be helpful in certain circumstances, but it should be paired with a clear repayment plan.

Important consideration

An SBLOC is not risk-free. If markets decline, you may need to add collateral or repay part of the loan quickly. Borrowing less than the maximum available amount, pledging a diversified pool of assets and maintaining a backup source of liquidity can help reduce the chance of forced selling.

3. Home Equity Line of Credit

A home equity line of credit, or HELOC, is a revolving line of credit secured by the equity in your home. It typically has a variable interest rate and allows you to borrow up to a lender-approved limit.

Many HELOCs include a draw period, often around 10 years, when you can borrow funds as needed. During this period, payments may be interest-only. After the draw period ends, the loan generally enters a repayment period, when principal and interest payments are required.₁

Because a HELOC is secured by your home, it can offer lower rates than some unsecured borrowing options. But that also means missed payments can put your home at risk.

When a HELOC may be considered

Home improvements
 A HELOC may be useful for home repairs, renovations or upgrades. In some cases, interest on a HELOC may be deductible if the funds are used to buy, build or substantially improve the home that secures the loan, subject to IRS rules and other limitations.

Emergency backup liquidity
 Some individuals open a HELOC before they need it as a backup source of funds. Because the application process can take time and may require underwriting, credit review and a home appraisal, opening a line before an emergency arises may provide more flexibility.

Major planned expenses
 A HELOC may help fund a large expense, such as education costs, a major purchase or a family event. However, using long-term debt for short-term consumption should be considered carefully.

Debt consolidation
 Because HELOC rates may be lower than credit cards or personal loans, some borrowers use them to consolidate higher-interest debt. This can reduce interest costs, but it also converts unsecured debt into debt secured by your home. A disciplined repayment plan is essential.

Important consideration

A HELOC can create flexibility, but it should not be treated as free money. Variable rates can increase over time, and repayment obligations can become more significant once the draw period ends.

Asset-Backed Borrowing Comparison Chart

Have a Clear Repayment Plan

Asset-backed borrowing can be useful, but it should have a defined purpose and a clear endgame.

Before borrowing, consider:

• Why do I need the funds?
• How quickly do I expect to repay the loan?
• What happens if markets decline or interest rates rise?
• Do I have other sources of liquidity?
• Could this loan put my long-term financial plan at risk?

Margin loans and securities-based lines of credit may be best suited for individuals who understand investment volatility and have the financial capacity to respond to collateral calls. HELOCs may offer flexibility, but because they are secured by your home, they require careful repayment planning.

The right borrowing option depends on how the funds will be used, the cost of the loan, the level of risk involved and the borrower’s overall financial picture.

Final Thoughts

Borrowing against assets can provide flexibility, but it should be done with intention. The goal is not simply to access more credit. The goal is to use debt, when appropriate, in a way that supports your broader financial strategy without creating unnecessary risk.

A financial advisor can help you evaluate how borrowing may affect your investments, cash flow, taxes and long-term goals before you use your assets as collateral.

 

 

₁ https://www.citizensbank.com/learning/heloc-draw-period-and-repayment-period.aspx

This article is for informational purposes only and should not be interpreted as specific advice. You should make decisions based on your unique objectives and financial situation. If you are unsure please work with an appropriate advisor to review your specific circumstances. Additionally, any statements made reflect our views and/or opinions and are not intended to guarantee any particular result.

Margin trading increases your level of market risk and your downside is not limited to the collateral value in your margin account. You can lose more than the value of your account and end up in a negative equity situation. The custodian holding your assets can initiate the sale of any securities in your account, without contacting you in accordance with their policies to meet a margin call. Work with your financial advisor to better understand the risks and how a margin feature would impact your financial plan.

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