When you have substantial investment assets, you may be able to borrow against their value to accomplish goals without upending your wealth management plans. Establishing a credit line based on your investments can unlock enormous strategic potential—as long as you use it carefully.
Imagine, for example, that you needed $500,000 to seize a real estate opportunity, fund a short-term business expense, or cover an unexpected tax bill. Selling investments to raise the money could trigger capital gains taxes and undermine your portfolio's growth potential. Using your assets as collateral for a line of credit, on the other hand, could give you ready access to the cash you need, without disrupting your portfolio or tax plans.
Securities-based lines of credit (SBLOC), however, come with unique risks, including the possibility that your investments could be liquidated to cover your outstanding loan, so it's important to understand how such arrangements work. Here are some things to know before considering such an arrangement.
The mechanics
Offered through a bank, a securities-based line of credit allows you to borrow against the value of stocks, bonds, and other assets in your nonretirement investment portfolio. (Assets in a tax-advantaged retirement account cannot be used for securities-based lending.)
Credit lines are based on the value and type of assets in the portfolio, with lenders typically advancing sums calculated as a percentage of the pledged assets. For example, a lender may accept 70% of the value of stocks, mutual funds, and exchange-traded funds (ETFs) and more than 90% of the value of certain Treasury securities and cash equivalents. Typically, the advance amount is more than what may be available through a margin loan from a broker (which is generally up to 50% of the investment value).
Though a wide variety of assets can be considered as collateral for a securities-based line of credit, stocks that trade for less than $10 a share may not qualify, nor will leveraged ETFs or those that have a high concentration of one or a few stocks.
Once your assets are pledged as collateral, they'll be held in a separate account at a broker-dealer. The lender wants to monitor the account and restrict its use to make sure that loans are properly collateralized and can be paid back.
If this sounds a little like a margin loan, that's because they are similar, though with an important distinction: You can use a securities-backed line of credit for just about any lawful purpose except to buy more securities or pay down a margin loan.
Banks typically require a minimum amount of pledged assets to establish a securities-based line of credit. For example, a bank may require you to pledge at least $100,000 of your investment portfolio to establish a line of credit. However, once the line is established, the bank will allow you to tap the line of credit whenever you wish, up to a maximum amount based on your collateral and the lender's rules, during the draw period.
The costs
A key advantage of a securities-based line of credit is that it generally costs nothing to set up. Typically, there are no application fees, loan origination fees, annual costs, or early repayment penalties. However, lenders can assess a late fee for not paying back the loan per the loan agreement.
Lenders typically charge variable interest rates that are based on the value of the pledged investment portfolio. Many investors decide to pledge a large portion of their investment account to get the best rate—lenders typically lower the cost of borrowing for greater asset amounts pledged. Interest on the loan amount typically accrues daily and is payable on a monthly schedule. Accrued interest charges are tacked onto the loan, in addition to any late fees, if unpaid.
The benefits
A securities-based line of credit may be a low-cost source of credit that offers:
Liquidity: The ability to tap the value of your investment assets without the need to sell.
Flexibility: You can use it for almost any lawful purpose, except to purchase, carry, or trade securities, or pay off margin.
Investment continuity: Since you're borrowing against investments, rather than selling investments, you can keep your investment strategy intact.
Tax-efficiency: Borrowing against your investments can help avoid capital gains taxes that may otherwise result if you sell investments.
Competitive interest rates: Compared to other forms of credit, especially if you have the financial ability to pledge additional collateral, the interest rate on a securities-based line of credit may be more favorable than other alternative sources of borrowing.
Additionally, the more favorable interest rate may be a potential source of leverage, or return arbitrage, where your borrowing costs may be smaller than the potential opportunity cost of selling your investments.
The risks
This type of borrowing may be convenient and cost-efficient, but it's still a loan and should be handled with care. Be aware of these risks:
Bank demand: If you accrue unpaid interest or a market dip leaves your pledged assets below the value necessary to support your line of credit, your lender will ask you to either pay down the loan, provide additional assets or cash as collateral, or identify assets in the portfolio to be sold. If you don't act, the lender will sell some of your assets, and you'll have no control over which ones it chooses.
If the bank needs to sell a portion of the portfolio, you will also be held responsible for any taxes due on the sale, which can increase your tax liability.
This risk becomes less of a concern if you keep your outstanding balance well below your approved line of credit. Choosing less-volatile assets for your collateral can also help manage this risk.
Borrow much less than the full amount of the credit line
| Category | Investor A | Investor B |
|---|---|---|
| Pledged amount | $200,000 | $1,000,000 |
| Borrowed | $170,000 | $170,000 |
| Pledged amountafter 30% portfolio loss | $140,000 | $700,000 |
| Bank demand to replenish pledged assets | $30,000 | $ - |
Source
SCFR. For illustrative purposes only. Individual situations will vary. Hypothetical scenario where the bank demand for additional collateral is based on meeting the minimum requirement that the pledged amount exceeds the outstanding loan amount. The bank at any time could sell the assets to satisfy the loan obligation.
Variable interest rates: Your initial rate is based on the value of your pledged securities, but it can fluctuate from there based on prevailing market rates—for better or for worse. If interest rates rise, the cost of carrying a loan will increase, too. That said, different banks may use different interest rates for the line of credit, but generally they are still less than those of credit cards or personal loans. For longer-term borrowing, such as the purchase of real estate, a fixed-rate loan may be preferable.
Examples of strategic uses of a securities-based line of credit
Bridge financing: A line of credit can be used to temporarily bridge two transactions. We see this most commonly with real estate, where the line of credit is used to purchase a new home before the sale of the old home, and then the line of credit is paid back when the old home sells.
Tax payment: Selling assets to pay for taxes can create more taxes, at potentially higher tax rates. Alternatively, a line of credit can be used to pay taxes. Doing so can help taxpayers manage their marginal tax rate, potentially saving on taxes.
Income smoothing: A line of credit can help when income is tight. This may be most applicable to households with uneven cash flow throughout the year, like small business owners, contractors, or commissions-based individuals.
Home renovation: Most homeowners don't deduct their mortgage interest due to the current high standard deduction amount ($30,000 for married filing jointly in 2025). If you can't take a tax-deduction on your mortgage interest, the cost of borrowing plays a larger role in deciding where to borrow money from. As a result, the generally reasonable interest rate on a line of credit may be an attractive option for homeowners wanting to finance home renovations.
Emergency/unexpected expense buffer: A line of credit may be used as a liquidity buffer in times of unexpected expenses and emergencies without having to sell investments.
Business equipment/inventory purchase: The flexibility, liquidity, and generally reasonable interest rates offered by a line of credit may be advantageous for business owners who want to purchase business equipment or shore up inventory in the short term.
Borrowing decisions
While a securities-based line of credit may be used by anyone eligible to establish one, it tends to benefit investors who can provide sufficient capital to meet bank demands, have the financial capacity to pay off the loan, and/or have the stomach to take on a line of credit based on investment assets that can be volatile.
Keep in mind that any gains you make from having your pledged assets invested in the market may help offset the interest costs of the loan, but the opposite is also possible if the value of the portfolio declines. It's important to consider both the best- and worst-case scenarios when comparing borrowing options. Lastly, while you can just pay the interest alone on a securities-based line of credit, we believe you should have a plan to pay off the balance.
Bottom line
If you understand the risks, a securities-based line of credit may offer advantages for the right investor. It may provide needed liquidity without the need to sell assets and could result in potential tax savings in the process. Knowing it's there, and having it ready, can be a valuable asset in and of itself. Speak to your Schwab financial professional team, which may include your financial advisor and bank specialist, to discuss lending strategies that make sense for your unique goals.
