Shares as Collateral for Loans
Use Your Un-Restricted Shares as Collateral for Loans
Using shares as collateral for loans is a common method for Borrowers access to short term income on an existing stock portfolio. When traditional banks and financial institutions hesitate, our private loan investors step in to offer innovative financing solutions.
A stock secured loan is when you the Borrower temporarily pledges stock to a Lender as collateral for a stock loan. The Borrower enters into a loan agreement with the Lender detailing the terms of the loan, how the Lender is paid, and how the collateral is maintained to protect the Lender in the event of default.
Loan Collateral
Not all stock portfolios qualify for stock loans with our investors and is not appropriate for all Borrowers. When shares serve as collateral, investors focus on publicly traded and unrestricted stocks as these are easier to sell if the borrower defaults. The securities must be “fully paid for”‘ and “free trading” meaning that they are owned outright by the Borrower, and not encumbered or margined.
The amount of the loan is typically a percentage of the value of the shares pledged as collateral, known as the loan-to-value (LTV) ratio. This ratio can vary depending on the type of securities and the lender’s policies, but it generally ranges from 50% to 70%.
Stock loan interest rates are usually favorable compared to other types of personal loans, and are usually fixed annually at 5-6% during the term of the loan. The repayment terms allow for interest-only payments with the principal due at maturity.
The collateral is secured in a custodial account established by the Borrower under their own name. The Lender specifies the location of this custodian Account, which holds the collateral and any additional collateral required to preserve the minimum value of the portfolio. The custodial brokerage’s location varies internationally, aligning with the stock exchange where the pledged stock is traded.
Throughout the duration of the loan, the Borrower has the ability to monitor their account and will receive regular statements detailing the status of the collateral. To safeguard the repayment of all Obligations and ensure the Borrower’s adherence to the covenants and responsibilities outlined in the Loan Schedule and Loan Agreement, the Borrower endows the Lender with a perpetual security interest in all present and future Collateral. The Borrower consents to the Lender exercising all rights granted under this Agreement regarding the Collateral, in addition to any other legal rights available to the Lender.
Loan Agreement
The loan agreement is tailored for each individual investor and provides an overview of the terms and conditions related to the transaction as well as remedies to events of default by both Lender and Borrower. The Borrower does not usually have to do anything beyond executing the initial loan agreement and payments are made in frequencies based on the terms of the agreement. Shares as collateral for loans requires the pledged securities to be held in a custodial account in which the Lender has full power and control over the account and the securities during the loan term.
If you are interested in pledging your shares as collateral for loans please contact us here for additional information.