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A pledged asset line or portfolio line of credit allows you to borrow up to the value of your investment portfolio, usually at a low interest rate.
Wouldn't it be nice if you could use the money tied up in your investment portfolio for something more meaningful? Maybe for an emergency or to pay off a high-interest credit card?
After all, the money is there, waiting for the investments to increase in value or for the investments to collect dividends.
But to access that capital, you need to liquidate your investments. That's essentially your only option. Liquidating your investments could mean a loss or a short-term gain, depending on their value, and the associated tax consequences.
However, there are better alternatives. They are called Lombard loans or margin loans to access a portfolio credit line.
Our preferred broker for a portfolio line of credit is Interactive Brokers. Interactive Brokers allows you to borrow against your investments without closing your positions (like some other companies do). Of course, you could take out a loan or use other borrowing alternatives. But using a portfolio line of credit can make sense because of the low interest rates.
Look at the typical interest of the alternatives:
- Credit cards: 22.93% effective annual interest rate
- Student loan: 7.05% effective annual interest rate
- HELOC: 8.5% APR
- Car loan: 7.1% to 11.30% effective annual interest rate
- Mortgage: 7.50% effective annual interest rate
With IBKRyou can borrow against your portfolio at an annual interest rate as low as 5.830%. That's compelling – so let's look at what using a portfolio line of credit looks like, why you should use it, and how you can take advantage of it.
What is a margin portfolio credit line?
A portfolio line of credit is a type of Lombard loan that allows investors to borrow against their stock portfolio at a low interest rate. The idea is that the loan is secured by your stock positions.
You can use this money to pay for virtually anything using your line of credit – from renovating your home to paying off other debts and more.
If you have a large amount of money tied up in your portfolio (perhaps through your own investments or because you received shares in an IPO), you may not want to sell your positions when you need cash. This is where the portfolio line of credit comes in. You can simply borrow against your positions without having to sell.
Since you don't have to sell your positions, you can also avoid taxes – which can be enormous for stocks with high appreciation.
You are allowed to borrow up to 50% to buy securities, and each broker has different borrowing limits. For example, M1 Finance lets you borrow up to 35% of your portfolio as a portfolio line of credit. The other cool thing is that there is no set repayment period. Your loan will accrue interest, but you can pay it back at any time – either through a cash deposit or by actually selling some securities and using that money.
What are the risks of borrowing from your portfolio?
It is important to be aware that a Lombard loan – just like any other type of debt – carries risks.
There are three main risks associated with Lombard loans and portfolio credit lines.
First, there is a risk that you will lose the money (thereby magnifying your losses) if you use it to invest.
Second, the interest rates on the loan could change. Currently, interest rates are at historic lows, but interest rates could rise in the future. In theory, they could also fall – which would be a small win.
Finally, you may be asked to make a maintenance call. If the value of your portfolio declines, your account may enter a maintenance call and you will either have to deposit new money or sell part of your portfolio to cover the loan. While you will usually be notified of the need to deposit additional money, if your portfolio suffers significant losses, the brokerage may automatically sell your shares to cover the loan (since it is required by law to do so).
What are the best use cases
There are a few use cases where we think using a portfolio line of credit makes a lot of sense. These use cases assume that you have a solid portfolio position (probably at least $100,000 or more) and the majority of the portfolio is made up of highly valued stocks – meaning you don't want to sell them.
In addition, we assume that you can afford the loan, regardless of whether it is a Lombard loan or not.
Debt consolidation: If you have other debts (such as credit cards), it can make a lot of sense to consolidate your debts into a Lombard loan. You would likely save a huge amount on interest – since the best Lombard loans are 6% or less, while credit card interest rates are in double digits.
Car financing: If you need to buy a new car, taking out a Lombard loan may make sense. The interest rates are likely to be lower than you would get for a purchase.
DIY supplies: If you're planning a renovation or addition, it may make sense to use a portfolio line of credit instead of a HELOC. Especially if you don't have enough equity in your home, a HELOC is justified.
We don't like using Lombard loans to buy more stocks. Yes, it can increase your profits, but it can also increase your losses – and that can hurt financially.
Where to find the best margin loans
Most major stock brokers offer margin loans or portfolio lines of credit, but we firmly believe that M1 Finance is currently the best place to go for margin loans.
Robinhood
Yes, Robinhood. In Robinhood's growing battle for wealthy investors, the company recently launched a competitive margin product that offers some of the lowest interest rates currently available.
When you combine these attractive margin rates with the bonus incentives for bringing assets to the platform, Robinhood has a compelling offering.
You can read our full review of Robinhood here.
Open a Robinhood account here >>
Interactive Brokers (IBKR)
Interactive Brokers is a platform aimed at wealthier and/or more active traders. In addition to a solid trading platform, IBKR is known for its highly competitive margin loans and portfolio credit lines. In fact, they are usually better than most “big” or “traditional” brokerage firms.
The minimum interest rate for IBKR loans is 5.330%, but most loans have rates around 6.330%, depending on the company's total assets and the amount of assets it owns. The lowest rate currently advertised, 5.330%, is for assets over $50,000,000. But even if you have $100,000 or less, you can get 6.330% (or the BM + 2.50%).
The great thing about IBKR is that you don't have to negotiate or fight for a good rate – just deposit the assets and borrow the money. Unlike Fidelity or Schwab, you can sometimes get a good rate, but you have to negotiate and get approval.
You can read our full review of Interactive Brokers here.
Open an account with Interactive Brokers here >>
Interest rates on pledged assets
M1 Finance and IBKR are in constant competition for the lowest interest rates. But Robinhood is also in the game.
Here's how other companies compare (note: many companies have smaller tiers, so we tried to choose the most common rounded numbers to make the chart readable):
Note: These rates were last updated on September 24, 2024
Remember that portfolio loan rates are closely tied to the Fed funds rate, and as the Fed funds rate rises and falls, published loan rates will also change.
Is it worth using a portfolio credit line?
If you think you need to borrow against your investments, M1 Finance is a good deal with its low loan rates. It can be a better option than a credit card, car loan or HELOC and offers several advantages from a tax perspective.
Just be careful not to push your brokerage account into a maintenance call, as this may result in your holdings being liquidated to meet the call. That would not only be annoying, but potentially costly.
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