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What Is Securities-Based Lending? | WTOP

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Securities-based lending is the practice of lending money to investors who use their securities, such as stocks, exchange-traded funds and…

Securities-based lending is the practice of lending money to investors who use their securities, such as stocks, exchange-traded funds and others, as collateral for the loan.

Getting a securities-backed loan can be a good way to get some liquidity when you need it without selling a portion of your portfolio. But there are some drawbacks to keep in mind if you’re considering it.

How Do Securities-Based Loans Work?

Securities-based lending is typically offered by large banks, brokerage firms and other financial institutions. Historically, it’s been available to high net worth individuals, but today it’s an option for investors with smaller portfolios. With money management platform M1 Finance, for instance, you need just $5,000 in your brokerage account to be eligible.

For the most part, you can use a securities-based loan for anything you want, but lenders may have some restrictions. If you want to use your investments as collateral to buy more securities, you can look into margin loans instead, which also come with significant risks. You typically can’t use a securities-based loan to purchase or trade securities, refinance or pay off a margin loan or repay any other loan that you used to buy securities.

The loan can come in the form of an installment loan, which must be repaid at a regular interval, or a line of credit, which you can use, pay off and use again.

When you apply for a securities-backed loan, the lender will determine how much you qualify for based on factors like your portfolio balance. You’ll typically only be able to borrow a percentage of what you have in your brokerage account, rather than its full value.

“You won’t be given a dollar-for-dollar loan due to the volatility of the market,” says Tolen Teigen, a certified financial planner and chief investment officer at financial advisory firm FinDec. “It’s not unlike a home equity loan.” While you can typically borrow up to 85% of your home’s equity, the range for securities-backed loans is usually between 50% and 95%, depending on the type of credit, your lender and the collateral.

“Not all securities are collaterizable at the same rate,” says Asher Rogovy, chief investment officer at investment advisory firm Magnifina. “Lenders dictate the amount that can be borrowed against each security.” For example, a bank might allow you to borrow 80% of your corporate bond holdings but only 50% of your stock holdings.

If the loan gets approved, the lender will place a hold on your securities or even keep them in a separate account until you’ve paid back what you owe. During that time, your portfolio will still be subject to market fluctuations, and you may even have gains. But until you’ve paid off the debt, you cannot sell your collateral without approval.

If you fail to meet your payment obligations, the lender can seize the securities you used to secure the loan and sell them to recoup its loss.

Also, if the value of your collateral decreases significantly, you may be subject to a margin call. If that happens, you may be forced to deposit more money into the account, or, if you can’t, the lender may choose to liquidate some or all of your portfolio to cover the margin call.

[Read: Best Personal Loans.]

The Pros of Securities-Based Lending

There are a few reasons to consider using your investment portfolio to secure a loan, especially if you have a lot of value:

It’s relatively inexpensive. Securities-backed loans typically charge lower interest rates than other types of loans that are unsecured. The rate is usually variable based on an index rate such as the 30-day London Interbank Offered Rate, and the lender generally adds 2 to 5 percentage points on top of that.

It’s fast. In many cases, you can get funds from a securities-based loan in just a few days. If you need money quickly, you could turn to a personal loan or credit card instead, but interest rates on those types of credit can be higher than on securities-based loans, especially if your credit is less than stellar.

You don’t have to sell. If you need money for a large purchase or to cover emergencies, you don’t need to sell some of your portfolio. “Instead of having to cash out and realize the taxation, you can keep the money growing and leverage the investment,” says Teigen.

There are less stringent credit requirements. There’s typically no credit check involved, so if you have a poor credit history but enough invested to get a securities-based loan, this can be an alternative to high-interest credit cards, personal loans and other short-term credit options.

The Cons of Securities-Based Lending

Although there are some clear benefits to using your investment portfolio to secure a loan, it could ultimately cause more trouble than it’s worth. Here are some potential pitfalls to keep in mind:

You may be subject to a margin call. If the value of your portfolio falls below a threshold set by the lender, you may be forced to add more funds to your investment account to satisfy the lender’s requirements. If you don’t, the lender may choose to liquidate some or all of your portfolio. You don’t have any control over which securities get sold, and the trade may lead you to owe more taxes.

You may lose your portfolio. If you can’t keep up with your payments on your securities-backed loan, the lender may decide to seize your assets and use them to cover what you owe. This is similar to the repossession of a vehicle on an auto loan or a foreclosure on a mortgage. When this happens, you may be subject to taxes based on the value of the securities at the time of the sale.

Your portfolio access may be restricted. Since your securities are being used as collateral for the loan, you won’t have access to certain account features. For instance, you may not be able to withdraw assets without permission. If you want to move your investing to a different firm, you may need to repay your loan first.

Interest is often variable. “Securities-backed loans are often based on a floating interest rate that could move from month to month,” says Rogovy. While that might not make much of a difference during times of low interest rates, it can get expensive if interest rates increase significantly.

How Does Securities-Based Lending Impact Your Credit?

Securities-based lenders may or may not run a credit check when you apply for a loan, and they may not report monthly payments to the credit bureaus. As a result, you won’t experience any credit impact from a securities-backed loan, either good or bad.

[READ: Best Bad Credit Loans. ]

That said, it’s important to check with the lender before you apply to understand how it handles your credit and what effects there may be if you go ahead with the loan.

Is a Securities-Based Loan Right for You?

If you’re considering using your investment portfolio to secure a loan, it’s important to understand both the benefits and the drawbacks of the process.

While it can be easy and inexpensive to secure funds using your securities, you may run into serious issues if the value of your portfolio drops significantly. As a result, it’s crucial that your portfolio is diversified to minimize risk. “It’s in the interest of both parties that the value of the securities remains stable so the lender doesn’t have to liquidate them,” says Rogovy.

What’s more, it may be worth it to consider using just a portion of your portfolio as collateral to limit your risks even further. For example, if you can borrow up to 50% of your account value, consider borrowing just 25% or 30% instead.

Before you apply for a securities-backed loan, take a moment to consider whether you actually need the cash in the first place — just because it’s easy and cheap financing, it doesn’t mean it’s necessary. “Should you take on this debt, no matter how you secure it?” says Teigen.

[Read: Best Home Improvement Loans. ]

If you’ve determined that borrowing is necessary, consider other options that may come with fewer risks. For example, while credit card interest rates may be higher, you could avoid paying interest entirely if you can get the money to pay off your balance before your statement’s due date. And while an unsecured loan may charge more, too, you won’t have to deal with potential margin calls or the liquidation of your assets.

As with any financial decision, it’s critical that you take the time to research all of your options before moving forward.

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What Is Securities-Based Lending? originally appeared on usnews.com

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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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