Most people see debt as something to be avoided at all costs. But that’s because most people don’t use loans properly. A prime example of improper credit utilization is credit cards. People charge very high fees, fail to pay off cards in full at the end of the month, then find themselves unable to pay off debt without paying a lot of interest, often for years.
However, some types of loans, such as a Securities-Backed Line of Credit, or SBLOC, may be helpful. They can also save or earn you money. SBLOCs are rolling lines of credit based on the value of the assets in your accounts. They are excellent ways to use loans to your advantage.
How Securities-Backed Lending Works
Borrowing money by collateralizing securities held in after-tax investment accounts is called security-backed lending. The interest rate will often be lower than for other types of loans, and you will usually have access to the funds within a few days.
However, like almost anything, there are some caveats to removing SBLOC. While you can continue to buy and sell securities in the Collateralized account, you cannot use the loan money for other securities-based transactions, such as trading or purchases. And setting up an SBLOC will make it more challenging to transfer those collateralized assets to a different firm.
As an example of how the SBLOC can benefit you, let’s say you need $75,000 for a one-time purchase of a car or a lifetime vacation. A typical way to achieve this would be to sell assets in a retirement account. It presents several drawbacks:
When you add up all the extra costs, you’ll end up spending about $93,000 for that $75,000!
If instead, you set up an SBLOC against a taxable brokerage account, then borrow $75,000 from the SBLOC, you can amortize the repayment over the next several years. This will allow you to avoid jumping into the tax bracket and defray those additional Medicare costs. In the end, in this case, you can save about $13,500 by using SBLOC. In addition, it allows you to still enjoy the benefits of owning properties that you would have otherwise sold.
Some Benefits of Security-Backed Lending
The benefits of SBLOCs do not end here; Even if you’re not retired, they can increase your purchasing power. A good example is buying a house. The real estate market has been tight, especially in the last few years. Often see homes on the market many offers To buy. If you are interested in a home that will potentially attract bidding competition, you can use SBLOC to make your offer unique.
Most homebuyers make offers contingent on financing approval. Even if your finances are sound and you are not at risk of failing to get approval for the mortgage, this is not true for all buyers. Deals sometimes fall through because of financing, leaving sellers stuck trying to find another buyer. Therefore, some sellers may decline any offer with financial contingencies to avoid burnout. Using SBLOC, you can make a cash offer – no bank financing required.
If the seller knows that your offer will not fail because of financing, they are more likely to accept it over contingent offers. Once you buy a home, you can take out a regular 30-year mortgage and use the money to pay off the SBLOC. It is a good idea to verify that you qualify for that mortgage before buying a home through an SBLOC, as you may be exposed to rising interest rates if you fail to obtain a fixed rate mortgage, Due to which you may have to spend a lot of money. ,
Other benefits to SBLOCs include:
- No setup fee.
- greater flexibility.
- Amortization over several years can reduce the tax burden.
Some Downsides of SBLOCs to Consider
Of course, while a SBLOC can be a powerful tool to save money or increase your purchasing power, it can also be misused. Some people set up SBLOCs but are not emotionally prepared to have a large stock of debt that they can draw on. They spend extravagantly, buy things like boats or sports cars, and later remember that SBLOCs are not free money; You have to repay what you borrow! Also, withdrawing from the SBLOC for a non-negotiable splurge diminishes the SBLOC’s ability to help you save or make money through more reasonable purchases.
For these reasons, when we set up an SBLOC for our customers in a defined financial plan, we ask them to come to the office any time they wish to use their SBLOC to make purchases. This allows us to run the numbers for them to make sure it is a wise use of the loan or explain why it may not be the best decision for their finances.
Other downsides to SBLOC to consider:
- Variable interest rates.
- A loss in the market can force the sale of certain assets in collateralized accounts, potentially exposing you to tax burdens and business expenses.
- Often, scheduled payments are interest only. Borrowers should be disciplined and have a plan to repay the principal.
Even after reading about the power of SBLOCs, you may still be concerned about the idea of knowingly taking on debt. that’s understandable; As Americans, we are conditioned almost from birth to see debt as dangerous and even embarrassing to our finances. However, when used properly, loans are a powerful way to enhance your financial standing.
Taking advantage of credit is a good thing, but it’s also complicated. That’s why it’s important to work with an experienced financial professional to make sure it’s done properly. You want to find a professional who considers it your job to find ways to maximize your finances over time and help you navigate strategies for your unique financial situation, such as harnessing the power of debt.
Principal, Director of Financial Planning, Defined Financial Planning
As Principal and Director of Financial Planning, Sam Guetta helps clients identify financial goals and make plan recommendations using the five domains of financial planning – Cash Flow, Investment, Insurance, Tax and Estate Planning. He is responsible for prioritizing clients’ financial objectives and implementing their investment plans effectively and actively monitors the constantly changing nature of clients’ financial and investment plans.
Attendance at Kiplinger was achieved through a PR program. The columnist received assistance from a public relations firm in preparing this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.