Many times, when a business or individual needs a large sum of money to make a purchase or pay a debt, they take out a loan to cover the cost.
But what if the timeline is short or the interest rates are too high?
For those looking to make a large purchase without selling off their assets to close the deal, securities-based lending might be worth considering.
What is Securities-Based Lending?
Securities based lending may go by several different names, including:
- Securities-based borrowing
- Securities-lending lending
- Non-purpose lending
- Non-purpose securities-based lending
- Stock loans (when the collateral pertains to stock)
Unlike a traditional mortgage or loan, securities-based lending offers cash quickly and at a low-interest rate by allowing borrowers to use securities to secure their loan.
Many people choose securities-based lending because they want access to a loan quickly and at a competitive interest rate. Because the borrower places his or her securities on the line as security, the lenders are able to provide the loan at a better deal.
The Pros and Cons of Securities-Based Lending
While securities-based lending sounds great, it isn’t for everyone. For all of its benefits, this type of loan comes with a higher risk some individuals may not be willing to take.
The biggest risk is when securities lose their value. For example, should a stock used as collateral plummet, thus losing its original value, the borrower may be faced with a forced liquidation.
This means the lender will be forced to sell the collateral, put it toward the loan’s remaining balance, and then seek out additional action to retrieve the remaining amount due from the borrower unless its a non recourse. It that case the borrower has no personal liability.
However, there are pros to this form of lending as well. Otherwise, it wouldn’t be as popular as it is today.
Both borrowers and lenders often favor securities-based lending because of its unique advantages. For borrowers, they can fund other investments without selling their existing assets. Likewise, lenders feel more secure in providing the loan because of the securities put up as collateral. The borrower’s securities are the lender’s insurance, so he or she often feels the loan is more secure.
The key to mitigating the risk in these loans is to evaluate the volatility of the borrower’s securities prior to taking out the loan.
Discover Stock Loan Options
Individuals who own stock but don’t want to sell it in order to pay for a large purchase should consider stock loans as a securities-based lending option. Stock Loan Solutions breaks down how it works here.
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