The Pros and Cons Of Margin Loan Financing

If you are in a financial crunch and own stocks or bonds, you are sitting on a financial tool that just might help you out of your temporary cash flow problems. Many people are just now rediscovering a financial tool called a margin loan, and more people than ever before are flocking to make use of margin loans. The allure of a margin loan is the ultra low interest rates that they offer, as well as the recovering stock market. In the first 3 months of 2012 over $331 billion was borrowed via margin accounts. Billions of dollars every single year are lent with securities as the collateral.

Yet margin loans can be fraught with hidden pitfalls and dangers. margin loans for certain will leave you with very little room for error. How do margin loans work? You will need a brokerage firm that you do business with, who will lend you money against the value of select stocks, bonds and mutual funds that you have in your investment portfolio. Any money that you borrow is referred to as a margin loan. When used correctly a margin loan can be a very valuable tool in your financial arsenal. While a margin loan can be used to leverage great profits, or to help you out of a financial pitfall, a margin loan can also result in great losses. If at any point for example that your securities value declines below the minimum equity requirements, you will be required to deposit either more securities or cash to make up the difference in order to meet the minimum requirements.

Margin loans are best leveraged to meet short term financial needs. They work in much the same way as you would leverage your property via a home equity loan, except instead of using your home as the collateral, you are using certain stocks, bonds and mutual funds instead. Most people make use of this tool to purchase more securities, although some people make use of it for short term emergencies. These loans allow you to borrow up to 50 percent of the value of any securities that you put up as collateral. The higher the loan amount, the more risk you are carrying, although if used correctly investors can purchase up to double the securities than they could have if just using cash. Margin loans can increase your buying power, which can come in handy if you need to quickly swoop in and scoop up a hot investment.

Your borrowing power will rise if your securities value increases, and by the same token your borrowing power will decrease if the stock prices that you hold fall. Your buying or borrowing power will tend to fluctuate each day according to the value of the marginable securities present in your portfolio. The main benefit is that these loans tend to have lower interest rates than bank loans or credit cards, although the rate will vary from brokerage firm to brokerage firm. There is no set repayment schedule, interest simply accrues on your account and you can repay the loan at your convenience. This interest is tax deductible if you use the funds to purchase a taxable investment. As with any type of loan you should carefully weigh all the benefits and risks before deciding if the loan is the right choice for both you, your unique financial situation and your own personal level of risk acceptance.