SBLOC Securities Backed Line of Credit | 3 things to know + lenders, rates, and more!

SBLOC Loans | Introduction and Quick Summary

✅   SBLOC stands for a Securities Backed Line of Credit and is a form of securities-based lending.

✅   Many brokerage firms and financial advisors offer this form of lending.

✅   It’s similar to something you may be more familiar with, a Home Equity Line of Credit (HELOC).

✅   Instead of pledging the value of a house you own, like in a HELOC, you pledge the value of your investment portfolio, brokerage accounts, and investment accounts, to secure a line of credit you can borrow against.

✅   You can usually use SBLOCs for anything you like other than purchasing additional securities or trading securities in any way. To do that, you need something similar called a margin loan.

✅   There are many SBLOC lenders available, many with different terms, conditions, and rates. While different institutions call an SBLOC by different terms, popular ones include Fidelity, IBKR, Wells Fargo, and Schwab.

?   SBLOCs have specific risks you should consider carefully, like the possibility of getting a margin call. Also sometimes called a maintenance call.

✅   SBLOCs rates tend to be lower than many other forms of borrowing since you are pledging collateral that has a clear, objective value and can easily be liquidated.

Despite the risks, I think everyone with an investment portfolio over $100K should consider having a securities-backed line (SBLOC).

I’m always amazed by how many of my wealthy and high-income friends don’t have an SBLOC set up, and even more amazed by how many have never even heard of one.

Simply put, you pledge your securities as collateral, in this case, stocks, bonds, etc., and in exchange, you get a line of credit.

So, why should you have an SBLOC? (pros)

 

Securities based lending (SBLOC) loans are a great way to access liquidity when you need it. It also allows you to create a loan for yourself whenever you need to, without having to wait around for sometimes stubborn and difficult bank approval. Interest rates are often low, especially compared to other types of personal loans, since it’s very clear how much the collateral offered is worth and it can quickly and easily be liquidated.

Oftentimes, you will also be allowed to “capitalize” the interest charged (in other words the interest is just added to the amount that is outstanding). Additionally, as long as the amount outstanding + capitalized interest does not exceed the amount authorized, there are usually no payments required (in other words it’s a revolving line with no required minimum payments). Generally, you will get lower interest rates the more you borrow.

So, with an SBLOC you can give a loan to yourself, for a low-interest rate, and pay it back on your own time. Pretty awesome!

Easy Securities Based Lending Math Example

• Let’s say you have a $20K expense. You’d rather pay $1K/mo for the next 21 months than $20K upfront.
• You also have a brokerage account worth $100K.
• So you set up an SBLOC and your financial institution (or financial advisor) offers you a $50K SBLOC.
• You use $20K of the line, which incurs a 5.0% interest rate. Since you’re borrowing $20K, you will incur $83.33 of interest in the first month ($20K * (5%/12), which is capitalized (added to) the original $20K drawn amount. You make a $1,000 payment at the end of the month, leaving you at $19,083 and so on.
• You end up making a total of $20,926 in payments, meaning you paid $926 in interest expenses.
• [Note for the math nerds: I calculated interest on a monthly basis here. Yes I realize most SBLOC lenders calculate it on a daily basis. The difference is small enough here to be not important.] 

SBLOCs Tax Deferral Benefit

Using an SBLOC, instead of liquidating securities may also have tax benefits. In the example above, if you had liquidated $20K of holdings subject to the 15% long-term capital gains rate, you would have incurred a $3K tax obligation in order to access your money. Of course, you will still owe that tax at some point, but by using an SBLOC, you’ve deferred that obligation

How are SBLOCs Different Than a Margin Loan?

One great way to have the equivalent of an SBLOC is to simply have a margin account with a brokerage. Oftentimes, this can function very similar to SBLOCs, if you want it to. My brokerage allows me to simply wire out any amount up to my margin loan limit, so I can create a margin loan to myself anytime I like.

The only downside is that they sweep any cash in that account against the balance of the margin loan. This can make keeping track of what’s going on a little more complex, f if you’re using investment accounts for more than one specific purpose each. 

In a perfect world, I’d rather have more control and only actively pay down the loan, but this is good enough for most situations as long as I’m willing to pay close attention.

Where can I obtain securities based lending? (or who are the best SBLOC lenders?)

The first thing to know here is that SBLOCs are available from most major brokerage firms and financial advisors. If you are with a large brokerage firm and/or financial advisor you should expect to be able to set one up through them. Some common ones includes Fidelity sbloc (technically a margin loan), IBKR, Wells Fargo, and Schwab. 

If your investment portfolio is with a smaller financial institution, they may not offer an SBLOC. Alternately, some smaller financial institutions will offer an SBLOC, but really it’s being underwritten by a larger institution, which may or may not be obvious or transparent to you.

Additional SBLOC Risks TO consider

Interest Rates. Since most SBLOCs are setup as a revolver, lenders protect themselves from rising rates by making the rate floating.  

Lack of Portability. If you change financial institutions, your SBLOC will not transfer.