Asset-backed Lending Solutions

3 Asset-backed Lending Solutions



Debt often gets a bad rap. But when managed responsibly, it can help you achieve your financial goals. In fact, the more assets you have, the more lending solutions you may have at your disposal.

⚀Home-equity line of credit

The home-equity line of credit is a debt vehicle that allows you to access cash from the equity in your home. The amount you can borrow is based on the equity that you have in your home and your ability to repay. It can be a good way to pay for college tuition, consolidate high-interest debt, do home improvements or finance a new home.

When to use it: 

· Home improvements: the funds can be used to buy, build, or improve your home. That can make it an attractive option for financing home improvements.

·   Liquidity: Even if you don’t have an immediate cash need, establishing a Home-equity line of credit can be a great way to back up your emergency fund or short-term savings. 

·   Debt consolidation: Interest rates on Home-equity line of credit often are much lower than those charged by personal loans, making them a potentially attractive option for consolidating debt and reducing borrowing costs. But you should have a solid payoff strategy before you consolidate higher-interest-rate debt, since you could be putting your home on the line if you can’t pay it back.

⚀Securities-based lines of credit

A securities-based loan is a revolving line of credit secured by collateral that is invested in stocks, bonds and other securities. This special type of loan features a variable interest rate and allows you to borrow against securities that you already own instead of having to purchase new ones. This type of loan typically has lower interest rates than other types of loans because it is secured by your investment portfolio rather than an unrelated asset such as a car or house.

When to use it: 

Because of the large initial advance requirement that may apply, a securities-based line of credit is best for:

Bridge financing: A securities-based line of credit is typically used for something that would otherwise be a short-term loan. For example, if wish to buy a new home before you’ve sold your current one, this type of credit line can provide a useful bridge between the two transactions.

Liquidity: When you need quick access to cash but don’t want to sell your investments  which can trigger capital gains taxes and upend your investment strategy, a securities-based line of credit could be a solution.

 ⚀Margin

Using margin to buy securities is an effective way to boost a portfolio's performance while controlling risk. Margin refers to lending money against the value of securities held in an investment portfolio. The use of margin allows investors who don't have sufficient cash available to take advantage of opportunities without sacrificing diversification or liquidity. It's equally important to understand the risks involved in this form of lending.

It’s important that the assets in your account are diversified, otherwise, you could quickly find yourself below the required maintenance threshold if that investment declines considerably.

When to use it: 

·   Additional investments: Active traders may establish a margin account as a way to take advantage of a trading opportunity when they don’t have adequate cash on hand. 

·   Short-term liquidity needs: You can draw from and replenish a margin account for any reason, not just purchasing securities. A margin loan is a ready source of credit that may be used as a short-term loan for any need.

Note: Have an Exit Plan

Margin and bank-offered securities-based lines of credit are best suited for those savvy about the markets. You need to know how much risk you’re taking on and be vigilant about managing that risk

 Risks involved in Securities-Based credit

 Leverage Risk

Depending on market conditions, the value of your collateral may fall. You may then be called upon to “top up” your account or to repay your outstanding credit facilities at short notice.

 Interest Rate Risks

The interest rate of your credit facility may increase, resulting in a higher interest payment amount for the facility.

Foreign Exchange Risks

Your credit facilities may be subject to additional foreign exchange risks if they are taken in a different currency other than that of your collateral. If the exchange rate moves against you, the repayment amount of the facilities may be affected.

 Change in credit Loan to Value (LTV) ratio

 LTV ratios are subject to periodic review and may change within a short period of time. When the LTV of your collateral is reduced, you will need to have sufficient liquidity to repay your outstanding credit loan or pledge additional collateral as security for the credit facility.


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