Securities-Backed Lines of Credit (SBLOC)
Securities-backed lines of credit are essentially loans taken out against the assets in an investor’s portfolio. They give investors access to cash without requiring them to liquidate their investments. SBLOCs are typically established as a revolving line of credit for which investors make monthly interest payments; they can also pay off the principal, or parts of the principal, at any point, and then borrow more against the portfolio. Unlike a term loan, an SBLOC, much like a home equity line of credit, has no stated maturity date nor any fixed repayment schedule. An SBLOC contract will lay out the amount an investor can borrow, and if the portfolio declines to a position where it can no longer support the SBLOC, the investor will receive a notification that they must put up additional collateral or repay the loan; otherwise the firm has the right to liquidate the investor’s securities and use the cash as repayment.
According to a Securities and Exchange Commission (SEC) investor alert, many broker-dealer firms rely on SBLOCs as “a key revenue source… especially in times of solid market returns and growing investment portfolios, when investors may feel more comfortable leveraging their assets.” Of course, like any other investment product, SBLOCs come with their share of catches and risks. They are non-purpose loans, meaning investors cannot use the proceeds of an SBLOC in securities transactions. They can, however, use the proceeds for most other purposes. In terms of credit limits, the majority of SBLOC contracts allow investors to borrow 50-95% of the value of their investment portfolio, though this varies from account to account. Many firms require that an investor’s assets meet a certain minimum market value, such as $100,000. Securities eligible to serve as collateral include stocks, bonds, and mutual funds in paid-for cash accounts.
Interest rates on SBLOCs are frequently below those of associated with personal loans or lines of credits from banks. They follow broker-call, prime, or LIBOR interest rates, and change daily, though they are usually charged monthly. SBLOCs sometimes let investors circumvent capital gains taxes, as they needn’t liquidate assets to access funds. Investors should keep in mind, however, that if their collateralized securities decline in value, they may be required to produce cash very quickly to pay off the loan or the interest. For more information on considerations to keep in mind when taking out an SBLOC, be sure to read the SEC’s investor alert on the subject.
If you have lost money after taking out a securities-backed line of credit, call the securities and investment fraud law firm Fitapelli Kurta at (877) 238-4175 for a free consultation. You may be entitled to recover lost funds. All cases are taken on contingency: we only receive payment if and when you collect money. Time to file your claim may be limited, so we suggest you avoid delay. Call (877) 238-4175 now to speak to an attorney for free.