Securities Loans – A Chance and a Risk
In the case of a securities loan, the lender’s security deposit serves as collateral. To be able to take out such a loan, the customer must have a significant securities deposit. This can be borrowed and serves the bank as collateral.
Owners of securities often use the securities loan to buy more securities. If the bank does not award it for a specific purpose, the money can be used freely.
Benefits of Securities Loans
A significant advantage is that the annual interest rate on the loan for securities is significantly lower than the lending rates for the collection or installment loan. In addition, the securities loan offers the customer flexibility, because once it has been granted, it can be used at will. The amount of the loan depends on the value of the securities account.
While the discretionary credit currently costs around 12 percent interest on average, interest rates on a dedicated loan for securities are below 7 percent in most cases.
Credit amount can be retrieved flexibly
A purpose-based securities loan is therefore an alternative to the dispo. He is equally flexible but just cheaper. Once established, the securities loan can be called up at any time if required. The securities loan is thus very well suited to bridge short-term liquidity shortages. As with the Dispo, the bank will only charge interest if the loan is actually used. Fees for the establishment and provision collect the custodian banks usually not.
The repayment of the securities loan can also be made flexible. The term is not limited. If the customer moves within the credit limit, only the agreed interest must be paid. However, users of securities loans should bear in mind that the credit line granted is not rigid. The amount of the approved framework depends on the value of the depot. If there is a turbulence on the stock market, the credit line can fall.
When determining the credit line, banks are not consistent. As a rule, the lending value of the custody account is between 40 and 60 percent of the current market value of the custody account.
If securities with a value of € 50,000 are held in the securities account of the borrower, the customer will receive a loan of € 25,000 with a mortgage lending value of 50 percent. If the prices rise, so does the credit line, if they fall, the credit line also falls.
Some banks handle the definition of the credit line so that the asset class of the securities is taken into account in the custody account. For secured investments such as bonds, the mortgage lending value is then higher than for risky investments such as certificates. Warrants are mostly excluded from the loan because of the high risk.
Falling courses and the risk for securities loans
The fluctuating credit line entails a risk for the borrower that should not be underestimated. If the prices of the securities in the custody account fall, the credit line is automatically reduced. Then it can happen that a borrower exceeds the credit limit involuntarily. The danger of this happening is especially great when the frame is almost exhausted. This can be very expensive for the customer. Not only that its depot loses value. There are also overdraft rates to pay for the loan, which are often twice as high. In addition, the Bank is entitled to require the Client to sell part of the loaned securities in order to settle the account. Since this happens at falling prices, high losses are inevitable.
A security loan can always be used as an alternative to the disposition credit if a securities deposit exists. The securities serve as collateral. That’s why the loan is cheaper.
The disadvantage of the securities loan is that there is an inadvertent overdrawing of the credit line when the prices of the loaned securities fall. This may result in the payment of high overdraft interest or, in the worst case, a distress sale of the securities being lent. Due to the significantly lower interest rates, the securities loan represents a sensible alternative to the discretionary credit in order to bridge very short-term liquidity bottlenecks. Who plans a long-term rescheduling to replace the Dispo, should check whether this project with a installment loan cheaper and safer to implement.