Most people view debt as something to be avoided at all costs. But that’s because most people don’t use debt properly. A prime example of improper debt use is the credit card. People charge too much, fail to pay the card in full at the end of the month, then find themselves unable to pay down the debt without also paying exceedingly high interest, often for years.
However, some kinds of debt, such as a securities-backed line of credit, or SBLOC, can be helpful. They can even save or earn you money. SBLOCs are rolling lines of credit based on the value of assets in your accounts. They’re excellent ways to use debt to your advantage.
How Securities-Backed Lending Works
Borrowing money by collateralizing securities held in after-tax investment accounts is called securities-backed lending. The interest rate will often be lower than other types of loans, and you’ll generally get access to funds in just a few days.
However, as with almost anything, there are caveats to taking out an SBLOC. While you can keep buying and selling securities in the collateralized account, you can’t use the loaned money for other securities-based dealings, such as trading or buying. And setting up an SBLOC will make it more challenging to move those collateralized assets to a different firm.
As an example of how SBLOCs can benefit you, suppose you need $75,000 for a one-time purchase of a car or a once-in-a-lifetime vacation. A typical way to acquire it would be to sell assets in a retirement account. That presents a number of drawbacks:
When you add up all the extra costs, you would spend around $93,000 for that $75,000!
If instead, you set up an SBLOC against a taxable brokerage account, then borrow the $75,000 from the SBLOC, you can amortize repayments over the next several years. This will allow you to avoid jumping up a tax bracket and prevent those extra Medicare costs. In the end, in this case, you could save around $13,500 by using an SBLOC. Plus, it allows you to still enjoy the advantage of owning the assets you otherwise would have sold.
Some Benefits to Securities-Backed Lending
The advantages of SBLOCs don’t end there; even if you’re not retired, they can enhance your purchasing power. A good example is buying a home. Especially in the last few years, the real estate market has been tight. Homes on the market often see multiple offers to buy. If you’re interested in a home that will likely attract bidding competition, you can make your offer stand out by using an SBLOC.
Most homebuyers make offers contingent …….