Securities-Based Lines of Credit (SBLOCs): Top Things to Know

Life happens fast. At some point, you might need quick cash for a down payment or to cover an unexpected expense.

You could sell some of your investments, but the time might not always be right. In a bear market, selling stocks might lock in a loss. Even in a strong market, you may raise cash, but you'll probably also acquire a capital gains tax bill.

There is another option to consider: stocks as a collateral loan. A securities-backed line of credit (SBLOC), also known as a securities-based line of credit, could provide you with access to cash so you can grab onto an investment opportunity or make ends meet.

However, you'll want to weigh the risks that come with an SBLOC before making a move.

How securities-backed lines of credit work

SBLOCs use the investments in your taxable brokerage account as collateral to back a revolving line of credit. This means you can borrow against what you own and make interest-only payments while using the principal, similar to a home equity line of credit.

To qualify, brokerage firms offering this lending solution may require a certain account balance and will calculate the maximum credit available to you — the collateral value — based on the eligible securities (generally stocks and bonds) within your account.

Because the market is a volatile place, you likely won’t be given a dollar-for-dollar loan, says Tolen Teigen, certified financial planner and chief investment officer at FinDec, a financial consulting company headquartered in Stockton, California.

“Perhaps you can use 60% to 70% of the value of your securities portfolio as collateral,” he says.

SBLOC interest rates

SBLOCs commonly have two interest rates: a variable interest rate (which can vary by broker, but generally follows the Secured Overnight Financing Rate) and a fixed interest rate. The fixed interest rate, sometimes called a "spread," is usually based on the amount of assets you have at the brokerage firm.

Often, the more assets you hold at the firm, the lower your interest rate will be, which is why SBLOCs often make the most sense for those with larger account balances, Teigen says.

Securities-based line of credit example

Let’s say you’re surprised by a sudden high tax bill and would rather not empty out your savings or sell stock to pay it. You also know that your annual work bonus is coming up in a few months’ time. You could use your stocks as collateral and obtain a loan to bridge the gap for now, paying the loan off once your bonus hits your checking account.

 » MORE: Top strategies to lower your tax bill

An SBLOC can use more than stocks

One common misconception about SBLOCs is that you can only use the stock in your brokerage portfolio as collateral. You can use many types of securities as collateral for a loan — bonds, mutual funds, ETFs or money market funds also count toward the total loan value you’d have access to.

Financial firms that offer SBLOCs will run a risk analysis on your portfolio when you apply for a loan. Diversifying your assets is one key way to reduce risk, and SBLOC lenders generally will offer higher loan maximums to well-diversified portfolios.

 » Learn more about investment diversification

Why use a securities-based line of credit

Though there are some hoops to jump through, establishing an SBLOC has advantages beyond avoiding capital gains tax consequences or undesired losses.

“It allows the investor to continue with their investment strategy without having to liquidate any holdings,” says Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Michigan. This means you won’t disrupt your portfolio’s asset allocation and can stay invested for the longer term.

“Typically, the investor has quick access to cash when they need to pull money from the line of credit, which creates flexibility,” Milan says.

Once your line is in place, you can usually access funds as needed within a few days. Repayment is also flexible as long as the required collateral value is maintained.

You can’t, however, use your SBLOC to buy other securities or repay margin loans.

Risks of a securities-backed line of credit

There are risks associated with SBLOCs. One of the biggest risks is that the ups and downs of the market will affect the collateral value of your account.

When the value of the securities in your account falls below a certain threshold, the broker will issue a maintenance call, which is like a margin call — an order to add more cash or securities to your account. If you're not able to add more cash, you risk having some of your securities sold to meet the call. And you may face an unpleasant surprise: Your brokerage firm has the right to liquidate positions — the stocks, bonds and other securities you're currently invested in — without notifying you or asking for your input.

Additionally, rates for SBLOCs are variable, not fixed. So in a rising interest rate environment, your originally low interest rate may start to climb.

For these reasons, using stocks and other investments for collateral should be approached carefully. When taking on any form of debt, it’s important to note a golden rule: Don’t bite off more than you can chew. Teigen and Milan agree that backing your SBLOC with less-volatile securities (like blue-chip stocks or bonds), using your credit line sparingly and having a concrete repayment plan are ways to mitigate the risks and ensure your SBLOC remains a useful tool.