With interest rates the highest they've been in 20 years, many would-be borrowers are hesitant to take the plunge. But is it really such a bad time to borrow?
"Depending on your goals, borrowing may make sense as part of your comprehensive wealth management strategy, even at today's rates," says Rob Williams, managing director of financial planning and wealth management at the Schwab Center for Financial Research.
For example, say you have a large tax bill coming due from the sale of an asset or a recent Roth IRA conversion. You may have enough assets in your taxable investment account to cover the bill; however, selling them could result in significant taxable gains—and another tax bill. "It may be better to avoid paying a tax bill in a way that will trigger yet more taxes," Rob says. "Plus, selling investments means losing out on future growth potential."
Instead, Rob suggests it may make more sense to borrow—especially if you have other funds coming in soon, such as a bonus, that you can use to repay the loan. "The sooner you can pay off the debt, the less important the interest rate."
As for the type of loan to pursue in the current environment, you may get the best rates by borrowing against existing assets, such as your home or investment portfolio. Here are two options:
- A home equity line of credit (HELOC) allows you to borrow against your home's equity and can be used for any purpose. Interest rates vary based on your credit score and the size of the credit line, but they may be less than those of credit cards or other types of personal loans.
- A securities-based line of credit (SBLOC) is backed by your nonretirement investment portfolio and can be used for nearly any purpose except the purchase of additional securities. Interest rates vary depending on the value of your collateral securities and your initial withdrawal amount, but they also may be less than those of credit cards or personal loans.
- Learn about Schwab Bank's HELOC.
- Learn about borrowing against your investment portfolio with Schwab Bank's Pledged Asset Line.
In both cases, you can tap the line of credit as often as you wish during the draw period, paying interest only on the amount you borrow.
"Just be sure to create a plan to pay down the new debt," Rob says. "While strategic borrowing may be helpful, it makes less sense if your short-term liquidity need turns into a long-term burden."
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Investing involve risk, including loss of principal.
The Pledged Asset Line is an uncommitted demand line of credit provided by either Charles Schwab Bank, SSB, or Charles Schwab Premier Bank, SSB. Entering into a Pledged Asset Line and pledging securities as collateral involves a high degree of risk. As a non-purpose line of credit, proceeds may not be used to purchase securities, pay down margin loans, or be deposited into any brokerage account. See schwab.com/PAL for more details. Before you decide to apply for a Pledged Asset Line, make sure you understand the risks. A Pledged Asset Line requires a brokerage account at Charles Schwab & Co., Inc.
Home equity lines may not be used as a bridge loan, to finance a start-up business, to change the square footage of the collateral, to invest in securities, or to repay a Schwab margin loan. Second lien Home equity lines are only available with an eligible first lien Schwab invested loan. Loans are subject to credit and collateral approval. Additional terms and conditions apply. See schwab.com/HELOC for details.
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