Most people view debt as something to be avoided at all costs. But that’s because most people don’t use debt properly. A prime example of debt abuse is the credit card. People charge too much, don’t pay the card in full by the end of the month, and then are often unable to pay the debt for years without also paying excessive interest rates.
Some types of debt, such as However, such as a line of credit secured by securities or SBLOC can be helpful. You can even save or make money. SBLOCs are rolling lines of credit based on the value of the assets in your accounts. They are excellent ways to use debt to your advantage.
This is how securities lending works
Borrowing by collateralizing securities held in after-tax investment accounts is known as securities lending. The interest rate is often lower than other types of loans, and you usually get access to the funds within a few days.
However, as with almost anything, there are limitations to completing an SBLOC. While you can still buy and sell securities in the secured account, you cannot use the borrowed money for other securities transactions such as trading or buying. And setting up an SBLOC will make it more difficult to move those secured assets to another firm.
As an example of how SBLOCs can benefit you, suppose you need $75,000 for a one-time car purchase or vacation. A typical way to acquire it would be to sell assets in a retirement account. This has a number of disadvantages:
If you add up all the additional costs, for that $75,000 you would spend about $93,000!
If you instead set up an SBLOC against a taxable brokerage account and then borrow the $75,000 from the SBLOC, you can amortize the repayments over the next few years. This way, you can avoid jumping up a tax bracket and avoid those extra Medicare costs. In the end, using an SBLOC could save you around $13,500 in this case. Plus, you can still enjoy the benefit of owning the assets that you would otherwise have sold.
Some advantages of securities lending
The benefits of SBLOCs don’t end there; Even if you are not retired, they can increase your purchasing power. A good example is buying a home. The real estate market has been particularly tense in recent years. Homes on the market often see multiple offers to buy. If you are interested in a home that is likely to attract bidding competition, you can differentiate your offering by using an SBLOC.
Most homebuyers make offers dependent on the financing commitment. Even if your finances are rock solid and you’re not at risk of not getting a mortgage approved, this isn’t true for all buyers. Deals sometimes fall through with funding, leaving sellers stuck trying to find another buyer. Therefore, some sellers may decline all offers with financing quotas to avoid burns. By using an SBLOC you can make a cash offer – no bank financing is required.
If the seller knows your offer will not fail because of the financing, they will be more likely to accept it than conditional offers. Once you buy the home, you can take out a regular 30-year mortgage and use the money to pay off the SBLOC. It’s a good idea to check that you qualify for this mortgage before buying a home through an SBLOC, because if you don’t get a fixed-rate mortgage, you can be exposed to rising interest rates that can cost you a significant amount of money.
Other advantages for SBLOCs are:
- No setup fees.
- Greater flexibility.
- Depreciation over several years can reduce the tax burden.
Some disadvantages of SBLOCs to consider
Of course, while an SBLOC can be a powerful tool for saving money or boosting your purchasing power, it can also be misused. Some form an SBLOC but are not emotionally prepared to have a large pool of credit to draw from. They spend money frivolously, buying things like boats or sports cars, and only later remember that SBLOCs are not free money; What you borrow must be paid back! Also, opting out of SBLOCs for ill-considered waste reduces the SBLOC’s ability to help you save or make money through smarter purchases.
For these reasons, when we set up SBLOCs for our clients at Defined Financial Planning, we ask that they physically come to the office anytime they wish to make a purchase using their SBLOC. That way we can get the numbers for them to make sure it’s a wise use of debt or to explain why it might not be the best decision for their finances.
Other disadvantages of SBLOCs to consider:
- Variable Interest.
- Market losses could force the sale of some assets in the secured accounts and potentially expose you to tax charges and trading costs.
- Frequently, planned payments are only interest. Borrowers must be disciplined and have a principal repayment plan in place.
The final result
Even after reading about the power of SBLOCs, you might worry if you’re intentionally running into debt. That is understandable; As Americans, we are conditioned almost from birth to see debt as dangerous to our finances and even as a shame. However, when used correctly, debt is a powerful tool to improve your financial situation.
Using debt wisely is a good thing, but complicated. That’s why it’s important to work with an experienced financial professional to make sure it’s done right. You want to find a professional who makes it their mission to find ways to maximize your finances over time and help you strategize for your unique financial situation, such as: B. Harnessing the power of debt.
Director, director of financial planning, defined financial planning
As Principal and Director of Financial Planning, Sam Gaeta helps clients identify financial goals and make plan recommendations using the five areas of financial planning – cash flow, investments, insurance, tax and estate planning. He is responsible for prioritizing clients’ financial goals and effectively executing their investment plans, and actively monitors the ever-changing nature of clients’ financial and investment plans.
The appearances at Kiplinger were achieved through a public relations program. The columnist was assisted by a public relations firm in preparing this article for submission to Kiplinger.com. Kiplinger was not compensated in any way.