Pledged Asset Line (PAL): Borrow With A Portfolio Line Of Credit

A pledged asset line or portfolio line of credit allow you to borrow against the value of your investment portfolio, typically at a low rate.

Wouldn’t it be nice if you could make better use of money tied in your investment portfolio? Maybe for an emergency or to pay down a high-interest credit card?

After all, the money is sitting there waiting for investments to appreciate or collecting dividends from investments.

But to access that capital, you’ll have to close out of your investments. That’s basically your only option. Closing out of your investments, depending on what they are valued at, could mean realizing a loss or a short-term gain and the tax consequences that go along with it.

However, there are better alternatives. It's called using a margin loan, or using margin to access a portfolio line of credit.

Our favorite brokerage for a portfolio line of credit is Interactive Brokers. Interactive Brokers allows you to borrow against your investments without closing your positions (as do some other firms). Sure, you could make a loan or use other lending alternatives. But, using a portfolio line of credit can be smart due to the low interest.

See the typical interest of the alternatives:

• Credit Cards: 22.93% APR
• Student Loan: 7.05% APR
• HELOC: 8.5% APR
• Auto Loan: 7.1% to 11.30% APR
• Mortgage: 7.50% APR

With IBKR, you can borrow against your portfolio as low as 5.830% APR. That's compelling - so let's look at what using a portfolio line of credit looks like, why you would want to, and how to do it.

What Is A Margin Portfolio Line Of Credit

A portfolio line of credit is a type of margin loan that lets investors borrow against their stock portfolio at a low interest rate. The idea is that the loan is collateralized by your stock positions. 

With that money, you can use your line of credit to pay for anything really - from home improvement, to paying down other debt, and more.

If you have a large amount of money tied up in your portfolio (maybe through your own investing, or you received stocks as part of an IPO), you may not want to sell your positions if you need cash. That's where the portfolio line of credit comes in. You can simply borrow against your positions, without having to sell.

Furthermore, by not having to sell your positions, you also can avoid taxes - which if you have highly appreciated stock, can be huge.

You're allowed to borrow up to 50% to purchase securities, and each broker has different levels for borrowing cash. For example,  M1 Finance allows you to borrow up to 35% of your portfolio as a Portfolio Line of Credit. The other cool thing is that there is no set repayment period. Your loan accrues interest, but you can pay it back anytime - either through a cash deposit or by actually selling some securities and using that cash.

What Are The Risks Of Borrowing From Your Portfolio

It's important to realize that there are risks involved in a margin loan - just like any other type of debt.

There are three main risks when it comes to a margin loan or portfolio line of credit.

First, if you use the money to invest, you could lose the money (and as a result, your losses are magnified). 

Second, interest rates on the loan could change. Right now, we're at historical lows for interest, but rates could rise in the future. Theoretically, they could also go down as well - which would be a small win.

Finally, you could be subject to a maintenance call. If your portfolio value declines, your account can trigger a maintenance call and you either have to deposit new cash or sell a portion of your portfolio to cover the loan. While you'll usually be notified of the need to deposit extra money, if your portfolio experiences significant losses, the brokerage may sell your stocks automatically to cover the loan (due to being legally required to).

What Are The Best Use Cases

There are a few use cases where we see using a portfolio line of credit as making a lot of sense. These use cases do rely on you having a solid portfolio position (likely at least $100,000 or more), and most of the portfolio is highly appreciated stocks - meaning you don't want to sell them.

Plus, we're also working under the assumption that you can afford the loan whether or not it's a margin loan.

Debt Consolidation: If you have other debt (such as credit cards), it could make a lot of sense to consolidate your debt into a margin loan. You would likely save huge amounts in interest - since the best margin loans are at 6% or less, while credit cards are double-digits. 

Auto Financing: If you need to purchase a new car, using a margin loan could make sense. The rates are likely lower than you could get for a purchase.

Home Improvement: If you're looking to do a renovation or addition, it could make sense to use a portfolio line of credit instead of a HELOC. Especially if you don't have enough equity in your home do justify a HELOC.

We don't like using a margin loan to purchase more stocks. Yes, it can magnify your returns, but it can also magnify your losses as well - and that can hurt financially.

Where To Find The Best Margin Loans

Most of the major stock brokers offer margin loans or portfolio lines of credit. However, we strongly thing that M1 Finance is the best place to get a margin loan right now.

Robinhood

Yes, Robinhood. In Robinhood's growing battle to attract high net worth investors, they recently launched a competitive margin product that has some of the lowest rates available currently.

When you combine these attractive margin rates with their bonus incentives for bringing assets to the platform, Robinhood has a compelling offer.

You can read our full Robinhood review here.

Open an account at Robinhood here >>

Interactive Brokers (IBKR)

Interactive Brokers is a platform geared towards higher net worth and/or more active traders. In addition to a solid trading platform, IBKR is known for their highly competitive margin loans and portfolio lines of credit. In fact, they are typically better than most "large" or "traditional" brokerage firms.

The minimum floor on IBKR loans is 5.830%, but most loans will see rates around 6.830%, depending on the balance and amount of assets at the firm. The lowest currently advertised rate of 5.830% is for over $50,000,000 in assets. But even having $100,000 or less can get you 6.830% (or the BM + 2.50%).

The great thing about IBKR is that you don't have to negotiate or fight for a great rate - simply deposit the assets and borrow. This is unlike the Fidelity or Schwab's, where you can sometimes get a great rate, but it requires negotiation and approval.

You can read our full Interactive Brokers review here.

Open an account at Interactive Brokers here >>

Pledged Asset Line Rates

M1 Finance and IBKR consistently fight for the lowest rates.

Here's how other companies compare (Note: many companies have smaller tiers, so we tried to pick the most common rounded numbers to make the chart legible): 

Note: These rates were last updated on June 3, 2024

Remember, portfolio loan rates are closely tied to the Fed Funds Rate. As it rises and falls, so will the loan rates posted.

Is Using A Portfolio Line Of Credit Worth It?

If you believe that borrowing against your investments is something you need, then M1 Finance, with its low lending rates, is a good deal. It can be a better option than a credit card, auto loan, or HELOC, and it has several benefits from a tax perspective.

Just be careful not to push your brokerage account into a maintenance call as that can result in your holdings being liquidated to satisfy the call. That would not just be annoying, but potentially costly.