Stock Secured Loans and Savings Secured Loans Compared

Secured loans can be used as an asset or collateral to lower the risk assumed by a lender. By lowering the risk, you can lower the potential interest rates charged and gain other benefits. Any asset can be used as collateral including home equity, vehicles and even investment accounts. Savings secured loans use standard savings accounts as collateral; stock secured loans use stock certificates as collateral. The two loans pose similar benefits and downsides.

Prevent Liquidation of Assets

Many borrowers get the cash they need for large purchases or emergencies by liquidating assets like stocks or savings accounts. Taking a loan against the assets instead allows you to get the cash you need without liquidating. At the end of the loan cycle, your assets will remain in place untouched. Most people prefer this option because it is slightly lower risk than liquidating outright. However, if you default, you will be asked to liquidate the asset to pay off the loan. There is still some risk involved.

Reduce Interest Rates through Positive Gains

If you had liquidated the asset, you would have lost the gains but saved on loan interest. When you have a stock or a savings account, you keep the funds in a place where they can grow over time. Savings accounts offer modest gains. Stocks may offer higher gains, but they may also drop in value over a period of time. In both cases, you can subtract the gains you have earned from the interest you are being charged on your secured loan to gain a better picture of the real cost of the financing. Once you have completely paid off your loan, you may learn you actually saved money by taking the loan instead of liquidating the stock using this formula.

Gain Lower Finance Charges

Securing a loan will reduce the cost of the loan. Lenders charge less when they offer a lower risk loan. The lender can always take possession of the collateral, whether it is a savings account or a stock, if you default. They will liquidate the asset to cover the loss. It is easier to liquidate a savings account than a stock certificate, which may have lost value. As a result, the charge on a savings secured loan may be a little lower and the limits a little higher than on a stock secured loan.

Lock an Asset

In both stock loans and savings loans, you will not have access to the asset while it is being used as collateral. For a stock, this means you cannot sell at any point. This can be a problem if you are advised it is the right time to sell the stock for profit. As a result, you should only secure loans against stocks you intend to hold for awhile. While your savings account is being used as collateral, you cannot access the funds for any reason. It is best to place only a small amount of your savings on hold for this reason. Your emergency fund should remain liquid in case it is required.

blog comments powered by Disqus