A securities-backed line of credit (SBLOC) lets you borrow against the investments in your brokerage account without selling them. It's the "borrow" in the Buy, Borrow, Die strategy, and it can be a useful tool. But FINRA and the SEC have both issued investor alerts about SBLOCs, because the risks aren't always obvious until markets fall.
How an SBLOC works
- Collateral: your eligible investments stay in your account and are pledged to the lender.
- How much you can borrow: according to FINRA, SBLOCs typically allow borrowing of 50% to 95% of the value of the pledged assets. The percentage depends on the type of asset. Diversified, liquid holdings get higher advance rates, while concentrated or volatile positions get lower ones. Many firms require at least $100,000 in assets.
- Interest: usually variable, set at a benchmark such as SOFR or prime plus a spread, calculated daily and charged monthly. Many lines are interest-only, so the balance doesn't shrink unless you pay it down.
- Use of funds: SBLOCs are typically "non-purpose" loans. You can use the money for almost anything except buying or carrying securities.
The key risk: maintenance calls
If the value of your pledged investments falls far enough, the lender issues a maintenance call. You must add collateral or repay part of the loan, often within two or three days. If you can't, the lender can sell your investments to cover the shortfall, without your permission and at whatever the market price is that day.
That creates a dangerous chain reaction. Markets fall, you're forced to sell near the bottom, those sales can trigger capital gains taxes, and you lose the recovery on the investments that were sold.
How much of a drop can you absorb?
Here's a simple way to see your cushion. If the lender's maximum loan-to-value is 60% and you've borrowed 30% of your portfolio's value, the portfolio can fall by half before you hit the limit (30% ÷ 60% = 50%). If you've borrowed 50%, a drop of just 17% puts you at the limit.
| You've borrowed | Max LTV 60%: drop to trigger | Max LTV 70%: drop to trigger |
|---|---|---|
| 20% of portfolio | 67% | 71% |
| 30% of portfolio | 50% | 57% |
| 40% of portfolio | 33% | 43% |
| 50% of portfolio | 17% | 29% |
Simplified illustration. Real maintenance requirements vary by lender and asset type, and lenders can change them.
Broad U.S. stock indexes have fallen more than 30% several times in recent decades. Borrowing near the maximum leaves little room for an ordinary bear market.
Other risks
- Rising interest rates. Variable rates can rise quickly. On an interest-only line, a higher rate means faster balance growth.
- Lender discretion. Lenders can typically change advance rates, demand repayment or restrict the line, sometimes without much notice.
- Reduced flexibility. Pledged securities may be hard to sell or transfer to another firm while the loan is outstanding.
- Concentration. Borrowing against a single stock is far riskier than borrowing against a diversified portfolio.
Questions to ask before you borrow
- What's the advance rate for each of my holdings, and what's the maintenance requirement?
- How is the interest rate set, and how often can it change?
- How much time will I have to meet a maintenance call, and how will I be notified?
- Can you change my limits or call the loan, and under what conditions?
- Where would I get cash to meet a call without selling? Answer this one yourself before borrowing.
Using SBLOCs more safely
- Borrow well below the maximum. Many planners suggest staying at a small fraction of the allowed amount.
- Keep a cash reserve or another source of liquidity for maintenance calls.
- Pledge diversified holdings, not a single stock.
- Pay interest rather than letting it compound, if you can.
- Stress-test your plan. In our Buy, Borrow, Die calculator, lower the growth rate and raise the interest rate to see when your loan-to-value crosses your limit.
Frequently asked questions
Is an SBLOC the same as a margin loan?
They're similar, since both are secured by securities, but margin loans can be used to buy securities, while SBLOCs generally can't. Their terms and maintenance rules differ too.
Is SBLOC interest tax-deductible?
It depends on how you use the money. Interest on money used for personal spending generally isn't deductible, while investment-related interest can have different treatment. Ask a tax professional.