Big Expenses: 4 Borrowing Strategies to Consider

Debt—used wisely—can be an important financial instrument that can help you pursue your goals, increase cash flow, and build long-term wealth. But not every instrument is right for every occasion or every person.  

Here are four loan types to consider, depending on your needs—plus pros, cons, and other factors for each. 

If you need cash to purchase securities or cover short-term expenses not related to investing, a margin loan may be worth considering. This type of loan requires you to have sufficient non-retirement investments in a brokerage account and allows you to use those securities as collateral.  

How it works: You must apply to add margin to your brokerage account and must meet minimum balance requirements, since your investments serve as collateral. Once approved, you can borrow up to a certain percentage of your assets' value, typically 50%. Interest on the loan balance is calculated daily and posts to your account monthly.  

Like a margin loan, this flexible line of credit allows you to borrow against the value of your pledged non-retirement investments. However, the funds cannot be used to buy additional securities.  

How it works: You apply for a SBLOC with a bank. The amount of credit available is based on the value and type of assets you pledge as collateral for the line of credit. Once your assets are pledged as collateral, they will be held in a separate account to ensure the loan is properly collateralized and can be paid back.  

A mortgage is a great example of how using debt wisely can help you achieve important financial goals—in this case, owning a home. If you're already a homeowner, refinancing an existing mortgage into a new loan with a lower rate can also help free up cash to put toward other goals. 

How it works: Your lender will first determine your creditworthiness and review your overall financial situation, which will affect your interest rate and the amount you're able to borrow. Once you're ready to buy a home, you must make a down payment to the lender—typically up to 20% of the purchase price—who will then loan you the funds for the purchase. You'll make regular payments, usually monthly, over a fixed period (typically 15 to 30 years). Each payment covers both the interest on the loan and a portion of the principal, which is the original amount borrowed. As you consistently make these payments, you gradually reduce the loan balance and build equity, meaning you own a larger share of your home. 

Home equity is calculated by subtracting your outstanding mortgage balance from your home's current market value. While having more equity can give you more flexibility to fund other goals, such as a home renovation, big purchase, or debt consolidation, you should be strategic with its use since you are collateralizing your home.   

How it works: If you have sufficient equity in your home (typically at least 20%), you can apply for a home equity line of credit with your existing lender or another institution. Once approved, your lender will set a credit limit that you can tap whenever you need it. Most HELOCs have variable interest rates, but sometimes you may be able to secure a fixed rate. You must make minimum monthly payments based on the amount you borrowed.  

Understanding the nuances between margin loans, SBLOCs, mortgages, and HELOCs can help you find the right borrowing solution for your needs. Each instrument serves distinct purposes and carries unique risks and benefits that should be carefully considered, ideally with the help of a financial consultant.