Ben, a small-business owner in the Chicago area, wanted to buy a new home but was having a difficult time securing a mortgage. He faced a classic “asset rich, cash poor” conundrum. Most of his net worth was tied up in his business, and his income was too sporadic for him to qualify for a traditional home loan. He had financial assets, including more than $1 million in various mutual funds, but didn’t want to sacrifice his plans for the future by selling them.
Ben needed help, so he set up a meeting with his longtime Schwab Financial Consultant, Paul Dunk.
Paul had confronted cases like this before: clients with ample assets who still needed a line of credit that, for one reason or another, they couldn’t get from a traditional lender. Thankfully, a solution was at hand.
Paul told Ben he might want to consider a Pledged Asset Line (PAL) from Schwab Bank to meet his financing needs. A PAL is a revolving line of credit secured by designated assets, such as stocks and bonds held in a pledged asset account within a Schwab brokerage account. Funds from a PAL can be accessed quickly and used for a variety of purposes, potentially making them a more flexible alternative for people who can’t or don’t want to access conventional forms of credit, such as home equity lines or mortgages.1
In Ben’s case, having a PAL would allow him to leverage the value of the assets in his Schwab brokerage account—without having to sell them—so he could buy his new home even as he continued working toward his future goals.
Next, Paul put Ben in touch with Kristen O’Brien, a Regional Banking Manager at Schwab Bank, who walked him through the details of how a PAL works. The conversation covered everything from the basics—what the application process is like, how a PAL works and what types of securities are eligible to serve as pledged assets—to more complicated issues such as interest rates and other technical details.
Kristen says PALs may be particularly appropriate for people who, like Ben, have assets but are reluctant to liquidate them to free up cash. Kristen adds that while many clients consider PALs to address real-estate-related issues, such lines can also help with other borrowing needs.
“For example, for business owners like Ben, a PAL is an excellent way to leverage their assets to help with cash management or a business expansion, rather than taking out a commercial loan,” she says. “Some clients also set up a PAL just to serve as a rainy day fund. After all, there’s no penalty if they don’t tap their line.”
Upon hearing the terms, Ben decided that a PAL suited his situation, so Kristen scheduled an appointment with the PAL Support Team to help him with the application.
The team helped ensure Ben’s application process was as straightforward as possible. In a quick phone call, a representative of the team helped Ben complete the application.
The representative also oversaw Ben’s application for a Pledged Asset Account (PAASB) to house the pledged assets.2 One of the benefits of a PAASB is that clients can continue to manage the pledged assets held in the account throughout the life of a loan, subject to certain conditions, including the maintenance of sufficient collateral in the account. Keep in mind, there are commissions and fees that may apply for the management and trading of the assets held in the pledged asset account.
In the end, Ben secured a PAL, giving him the money he needed to buy his new home—without having to immediately liquidate investments or deviate from his long-term financial goals.
“This can be a great product for many people, especially those with significant assets who may be having a difficult time qualifying for traditional loans,” Kristen says.
1Proceeds may not be used to purchase securities or to pay down margin loans; proceeds may not be deposited into a Charles Schwab & Co., Inc. (Schwab) brokerage account.
2Schwab Bank requires that the assets pledged as collateral for the Pledged Asset Line be held in a separate Pledged Asset Account (PAASB) maintained at Schwab. Schwab Bank establishes collateral requirements regarding the type of assets, value of assets, and concentration of assets that are required to be maintained in the PAASB as collateral for the Pledged Asset Line, and reserves the right to change the requirements from time to time. The collateral requirements must be satisfied in order to borrow on the Pledged Asset Line and to maintain the Pledged Asset Line in good standing.
Pledged Asset Line from Charles Schwab Bank
With a Pledged Asset Line from Schwab Bank, approved clients can borrow up to 70% of the value of pledged eligible assets for a standard five-year term, with no penalties for early repayment.
Most decisions on completed PAL applications are made within 48 hours. After securing a PAL from Schwab Bank, clients will receive a checkbook they can use to draw from their accounts, and can also begin requesting draws by wire transfer.1 They will receive paper statements listing the maximum line amount and any outstanding loan balances. They can also obtain up-to-date information by calling the PAL Service Team.
The interest rate on a Schwab Bank PAL varies according to the size of the credit line. There are no application fees or other set-up costs, and most account fees—such as those for wires, returned payments, draws and checks—have also been eliminated.
Pledged asset lending involves a high degree of risk. If the value of your collateral account falls, your credit line may be lowered and you may have to deposit more cash or securities to meet a maintenance call. In addition, your pledged securities could be sold without your consent, which may result in tax consequences.
To learn more, visit schwab.com/PAL.