Despite incredibly low interest rates, a lot of folks have had a tough time borrowing money lately. Consider:
- With home prices plunging, many homeowners are underwater on their mortgages, giving them no equity to pull out through refinancing or home equity loans.
- Card issuers like American Express (NYSE: AXP ) and Wells Fargo (NYSE: WFC ) are cutting credit card limits for many cardholders, especially those whose risk profiles look particularly suspect (such as those who are near their limits already).
- Even if you have a credit card, average rates remain stubbornly above 10%, even in the so-called "low interest" card category.
What's more, even if you still have access to credit, it can be a hassle. Credit cards demand minimum monthly payments, and if you miss one, then you'll see your interest rates skyrocket -- often on all your cards. Refinancing often requires a new mortgage application, home appraisal, title insurance, and a host of other requirements -- all with healthy fees attached, of course.
So if you want a loan without having to jump through a bunch of hoops, where should you turn? The answer is simple: Talk to your broker.
Excuse me?
Don't misunderstand me. I'm not telling you to liquidate your long-term investments just to meet a short-term cash need. You shouldn't do that unless you really have no other choice.
But if you have the right type of brokerage account, known as a margin account, you can use the value of your portfolio as collateral to get a cash loan. And as long as you know the risks involved and steer clear of a few potential big traps, you may find that it comes with the best terms you can get -- especially now.
How it works
You may already have a margin account, even if you've never realized it. Many brokers automatically sign you up for a margin account unless you specifically ask for an account without margin, also known as a cash account. There often aren't any extra fees involved, and if you never use it, you could easily never notice it.
How you actually make a request to use your margin for a loan depends on your particular broker. In general, though, it's generally a pretty simple process, and as long as you meet your particular broker's requirements for margin, it's likely that you'll get approved.
When it comes to interest rates and total cost, margin loans compete very well against other types of loans. Take a look at some specific figures I found recently:
|
Broker
|
Margin Rates
|
|
E*Trade Financial (Nasdaq: ETFC )
|
3.99% to 6.99%
|
|
TD AMERITRADE (Nasdaq: AMTD )
|
6.25% to 9%
|
|
Charles Schwab (Nasdaq: SCHW )
|
6% to 8.5%
|
|
Fidelity
|
3.75% to 8.575%
|
|
Interactive Brokers
|
0.49% to 1.74%
|
|
Morgan Stanley (NYSE: MS )
|
4.625% to 9.5%
|
Source: Company websites.
The rate you'll get depends on how much you borrow -- generally, for small loans, you'll pay higher rates than for bigger loans. But even the highest rates on this list compare well with credit cards.
Margin loans are also flexible. Typically, there's no set repayment schedule -- it's just up to you to repay. If you don't make a payment one month, the interest just gets added to your outstanding balance. There aren't any late fees, and your credit doesn't get damaged for missing payments.
But I thought margin was bad!
You're right -- many investors have gotten hurt using margin. Executives at Chesapeake Energy (NYSE: CHK ) and Boston Scientific had to sell out of huge positions in their respective companies when the value of their portfolios dropped below what was required to support their margin loans. Since your portfolio is your collateral, your broker has the right to force you to sell stocks if their value drops below a certain point compared to your outstanding loan balance.
That's why I'd never advise that anyone borrow an amount that got remotely close to their loan limit. And if you anticipate not being able to repay the loan for a long time, there's definitely some risk involved. But for short-term needs, margin loans are often the simplest way to get much-needed money quickly and cheaply.
For more on how your broker can help you, read about:
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