Three Ways to Borrow Against Your Stocks or Cryptocurrency
In the last decade, alternative assets like cryptocurrencies and non-fungible tokens (NFT) have ballooned in value; the traditional equity markets have been on a tear; and a class of tech companies has gone public at incredible valuations, all minting a cast of new millionaires (and billionaires) among the Millennial generation.
Risk is on, and selling assets to make up for cash needs and budgetary shortfalls has never been less appealing to many aggressive investors.
That’s partly why banks and financial institutions across the globe have begun recommending that wealthy customers borrow against their invested assets rather than sell. And while this method of borrowing comes with unique risks, it carries benefits that have made portfolio-backed borrowing some of the fastest-growing new liquidity options on Wall Street.
Can You Borrow Against Stocks and Crypto Assets?
Rather than securing a loan based on your credit history and income, a slew of loan vehicles allow you to make use of your invested assets to access cash, often at low risk to the financial institution – and possibly to the borrower.
Since customers put up assets as collateral in most lending situations, it's rare for a bank to suffer losses from many of these arrangements. As such, getting loans at 3% APR or less is not uncommon for these types of loans. The amount that financial institutions are able to offer is pegged to the value of your collateral, and with the right portfolio it's possible to receive a cash loan worth 30% of the value of your account. Some loan providers will go as high as 65%.
If you're interested in using your stocks or crypto portfolio/s to back a loan, you have several options available.
Securities-backed loans fall into one of two categories: recourse and non-recourse. Recourse loans allow lenders to pursue additional assets beyond the value of your original collateral if the loan goes unrepaid. Non-recourse loans permit the lender to seize only the original collateral.
Which you prefer will depend on your situation.
Three Ways to Borrow Against Your Stocks
Non-recourse stock loans, a portfolio line of credit, and margin lending all consist of pledging shares or cryptocurrencies to a lender or custodian until you repay your loan. Some are transferred, others not. Much like a home mortgage or vehicle loan, should you fail to make payments on the loan, the lender can act as an agent and sell them on your behalf to pay off the loan. If your terms dictate that the loan was full recourse, the lender will also be able to pursue other assets should the collateral become worth less than the value of your loan. Pegging your securities loans to a diversified portfolio or seeking out non-recourse financing are two ways to limit your potential losses if your investments rapidly lose value.
There are key features that prevent these types of loans from being interchangeable. For one, traditional margin lending serves the explicit purpose of taking on additional risk to purchase new assets with debt secured by your existing portfolio, and these loans are made by brokerage firms. Alternative securities-based loans, such as a portfolio line of credit or a non-recourse stock loan typically create cash and are not necessarily intended for buying additional securities. This can reduce risk to the lender, which translates into lower costs for the customer and an affordable loan to accommodate liquidity needs.
It’s important to note, however, that these limits are variable and can change with the value of your assets. If the stocks or crypto you're using as collateral for a loan experience a rapid drop in value, you may have to increase the value of your collateral (add cash or assets to the portfolio) or sell.
Here are three ways to borrow against your invested or portfolio assets.
Securities-Based Margin Lending
Margin loans are an umbrella term that represents lending to enable the purchase of new investments. Compared to other securities-based loans, margin lending can carry higher interest rates, stricter terms, and is less likely to be non-recourse. All of this stems from the fact that these loans carry higher risks to the lender, as going into debt to expand your investments carries the risks of overextending yourself and makes you more vulnerable to price changes.
Nonetheless, many investors have successfully used margin lending to take larger market positions, and it's a valuable tool for the active trader or investor.
Traditional margin loans have been around for decades – they may also be the riskiest option depending on your collateral.
Non-Recourse Stock Loans (or Crypto Loans)
For all of the benefits of securities-based margin loans, the risk that you might lose your assets in the event of a stock market crash is real.
The worst-case scenario has happened. You’re holding 65% of the value of your assets in a loan, and after losing much of their value in a 2008-style financial crisis, your lender forces you to sell – then begins going after your other assets.
The purpose of a non-recourse stock loan is to prevent the fire from spreading and allow you – the borrower – greater simplicity with the liquidity it creates. This type of loan allows the lender to claim your collateralized assets if you're unable to pay the loan, but the recourse ends there. Should the value of your assets drop so far that your collateral becomes worth less than the loan, the lender simply has to accept the loss.
Since non-recourse stock loans shift some risk from the customer to the lender, they generally have lower loan-to-value ratios than other options. The deal is also simpler for both parties.
Non-recourse stock loans or non-recourse crypto loans have become popular with insiders, executives, and large investors who need liquidity but cannot (or don’t want to) sell concentrated equity or crypto positions in the open market.
For instance, young investors or inventors of cryptocurrencies often amass considerable wealth in large concentrated positions, and they’re either unable to or uninterested in selling their position. The same goes for entrepreneurs in the recent wave of public tech companies. Both have large, illiquid positions and may need cash to pursue new ventures.
Because a non-recourse stock loan is secured only by the asset, with no opportunity for the lender to pursue other assets, it presents a compelling option for these individuals.
Portfolio Line of Credit
When you pursue a portfolio line of credit loan against your invested assets, you aren't simply pegging the loan to a single account or asset. Instead, most borrowers will include a collection of assets – often a diversified portfolio– as collateral. This serves as a bulwark against market instability, as more stable assets in a bond/equities portfolio, for example, will soften the blow from more volatile securities.
Cryptocurrency portfolio lines of credit have become popular due to lower perceived correlation to the broader market.
By bringing together a diverse combination of stocks, cryptocurrencies, bonds, and more in a portfolio line of credit, you make it less likely that you'll be forced to sell. Even under full-recourse loan terms, a diverse portfolio may allow you to reap the benefits of borrowing against your stocks and crypto while experiencing less long-term risk. Still, they are typically full recourse in nature and not suitable for everyone.
Who are Security-Based Loans For?
Securities-based loans – aside from margin lending in a brokerage account – aren’t suitable for the average American, partly due to the tax regulations surrounding retirement accounts. Most of middle-class America’s considerable assets are tied up in deferred accounts and their homes. Since delaying or avoiding capital gains may be part of the appeal of securities-based loans, portfolio lines of credit and non-recourse stock loan products are mostly oriented towards the wealthy and those in other locales, like the U.K., China, and more.
For instance, startup owners, private pre-IPO employees, small retailers, corporate executives, insiders, and people with meaningful holdings in taxable accounts can all benefit from borrowing against their stocks and crypto. The question is which vehicle best suits their needs.
Why Use Security-Based Loans
There are numerous benefits to using securities-based loans, such as maintaining control of your assets and accessing “paper” wealth.
Cover Budgetary Shortfalls without Selling
If you have plentiful assets but inadequate cash flow, selling your invested assets may not be appealing in the current environment. This period of unparalleled growth in the stock and crypto markets – if trends hold – can outweigh the cost of interest.
Low Interest Rates
It's rare for financial institutions to take losses on securities-based loans, particularly full recourse loans. As such, they entail uniquely low interest rates that are more favorable than credit cards and the average bank loan.
Avoid Capital Gains Taxes
Capital gains taxes on large asset sales can be remarkably painful. Depending on your location, securities-based loans may be a compelling way to access liquid wealth without generating a substantial taxable event.
Maintain Control of Your Assets
Whether your collateral consists of shares in a business, stocks, or Bitcoin, you retain the underlying value of your assets even as you hold the loan. For executives and company insiders, that may be important based on the opportunity for long-term appreciation, or it may be necessary due to the optics of open-market selling. A non-recourse stock loan can be a good solution for concentrated positions (we specialize in non-recourse stock or crypto lending in markets globally). You won't necessarily see control of your company slip away, nor will you miss out on the value that comes with the legendary rallies cryptocurrencies have become famous for.
The Risks of Securities-Based Loans
In many situations, securities-based loans can be superior to selling as a means of generating cashflow, though they’re not without risk. If the value of your assets declines, your lender may be forced to liquidate your collateral, and in the case of a recourse loan, the lender may be able pursue other assets.
Non-Recourse Loans From GetAStockLoan.com
Non-recourse loans are our specialty, and our agents can help you secure a loan against your stock or cryptocurrency quickly and at favorable rates. We lend for positions from $5 to $100 million and operate in almost every exchange and region globally.