Here's What Happens When You Borrow Money Against Your Investments

If you need to borrow money, you probably have a good idea of the most common options. There are personal loans that you can use for almost anything. If you're a homeowner, you could qualify for a home equity line of credit (HELOC). Credit cards are another popular choice, although they typically have high interest rates.

An option that doesn't get talked about as much is borrowing money against your investments. It's called a portfolio line of credit, also known as a margin loan. Many of the top stock brokers offer this, provided you meet their portfolio value requirements.

There are a few big benefits with this type of line of credit, so it's worth considering if you have enough in your brokerage account. Here's what you can expect when you get one.

Your investments serve as collateral

A portfolio line of credit is backed by the investments in your account. That makes it a secured line of credit, similar to a HELOC, which is backed by your home.

The amount that you can borrow depends on the market value of your investments. It's generally anywhere from 30% to 70% of the value of your investments, depending on your stock broker.

You can get a low interest rate with no credit check

Your broker isn't taking much risk with a portfolio line of credit. If you don't pay, it has your investments as collateral. Because they're low risk, portfolio lines of credit tend to have low interest rates.

The interest rate will depend on your broker and the current market rate. You can usually expect a portfolio line of credit to cost less than a personal loan, and rates are often similar to HELOC rates. Keep in mind that this will be a variable rate, so it can go up or down.

There's also no credit check required to get a portfolio line of credit. Your credit score isn't a factor in getting approved or your interest rate.

The payment schedule is up to you

Another benefit of a portfolio line of credit is that there's no preset payment schedule. You're not required to pay a minimum amount, and there won't be any late fees if you don't make a payment by a certain date.

Your broker will charge interest on the outstanding balance, so you shouldn't carry a balance or stop making payments just because you can. But you'll have the flexibility to make payments based on what works with your current financial situation.

If the value of your investments drop, it could lead to a margin call or liquidation

The biggest risk of borrowing money this way is that the value of your investments could drop. If the value of your portfolio falls below the threshold for what you borrowed, two things can happen:

• Your broker can issue a margin call. You're then required to add cash to your account until you're back above the threshold
• Your broker can liquidate some of your investments. Brokers will typically issue a margin call first, but keep in mind that the terms normally say that they're not required to do this.

Let's say you have a $100,000 portfolio and can get a portfolio line of credit for up to 70% of that. You borrow $70,000. If the market declines and your portfolio drops to $90,000 in value, you'll be overleveraged. Your broker will issue a margin call, and you'll need to deposit $10,000. Otherwise, your broker could start selling your investments.

To be on the safe side, it's better not to borrow up to your limit. The more of a cushion you leave yourself, the less likely it is that you'll experience a margin call or a selloff.

A portfolio line of credit can be a good way to borrow money if you have a large investment portfolio. Make sure you fully understand how it works and the risks involved before you borrow, to avoid putting your brokerage account at risk.