Characteristics of Stock Loans
Non-recourse are stock loans where borrowers take out using their stock as collateral. Stock loans are normally quite lucrative because of several reasons as we will see in this article. Stock loans charge very low-interest rates because the lenders use the borrowers stock as the security. Secondly, because the collateral is the actual stock, the loan also works as some hedge especially when the markets become volatile; this means that even in a case of default the borrower only stands to lose only the stock that they pledged. For instance, the normal stock loans range between 45% to 65% of the existing stock market value. If unfortunately, the market does not favor the stock, the borrower stands to lose around 35% to 55% of the stock value as they will have already received the loan amount. Additionally, the borrower can access the upside of the appreciation of the stock and also access capital to go on doing other business ventures like investing in real estate.
You can use the proceeds from the stock loans to do other business activities which makes stock loans flexible. Accessing stock loans is fast, they are quickly funded which normally takes less than seven days for an approval. Loan maximization in stock loans is possible meaning that you can get 80% of your stock value in the form of security loan. When comparing stock loans and margin loans, you will notice the maximum loan does not go beyond 50%. We have also seen that stock loans are non-recourse meaning that should the value of your stock go below you stock loan amount, you are able to keep the proceeds from the stock loan and relinquish your stock. Stock loans appreciate in value so if you are a stockholder you use up your stock loan instead of liquidating the portfolio with complete knowledge that after some time your stock will appreciate. A stockholder will benefit if the stock value goes up.
To conclude, so do you want to keep your stock investments just as they are? Are you in love with your stock picks because you believe they are not doing badly? You may be thinking next year your prospects will be greater, so you don’t want to sell the stock or leave the market. In all these scenarios, you may not know what to do.
Taking a stock loan to act as your stock investment could be the solution. You are in essence putting a floor for any possible gains or losses. This is possible in stock loans. You should not sell your shares instead just let them remain in the market and work for you.