A portfolio line of credit (PLOC) and a home equity line of credit (HELOC) are both collateralized loans, meaning they’re backed by assets. However, a portfolio line of credit uses your investment portfolio as collateral, while a HELOC uses your home equity.
With both types of loans, your lender can sell the asset under some circumstances to recoup its funds in the event you default on the loan. If you need to borrow money, you may be weighing your choices between a portfolio line of credit and a home equity line of credit.
Learn more about the differences between a portfolio line of credit and a HELOC. We’ll cover how each loan type works, the pros and cons of each, and whether they make sense for your situation.
What’s the Difference Between a Portfolio Line of Credit and a Home Equity Line of Credit (HELOC)?
A portfolio line of credit, also referred to as a securities-backed line of credit (SBLOC), is a type of margin loan that lets you borrow against your investments. PLOCs allow you to borrow money using the assets in your investment account as collateral without selling.
With PLOCs, you’ll usually receive a line of revolving credit with no maturity date. However, most PLOCs are demand loans, meaning your lender can demand repayment at any time.
You could face a margin call, where the lender requires you to deposit more money if the value of your investment drops below a certain limit. If you don’t deposit enough, your lender could sell some of your assets to bring your account into compliance.
A HELOC, or home equity line of credit, uses your home equity as collateral to establish a line of credit. You receive a line of credit that you can use and repay similarly to the way you use a credit card. HELOCs often have a draw period of about 10 years, where you can borrow as much as you want up to the limit, followed by a repayment period that’s usually around 20 years.
If you fail to repay the loan, you could lose your home and the equity you’ve built. Your lender can also freeze or reduce your home equity line of credit if your home value declines significantly or if your lender believes you could miss payments due to a material change in your finances. If this occurs, you may be able to restore the credit line by getting a new home appraisal and providing copies of your credit reports.
Both portfolio lines of credit and HELOCs have variable interest rates. Most lenders base both rates on an index, typically the U.S. prime rate, plus a margin rate. For example, if the prime rate is 3.5% and you pay a margin of 2 percentage points, your interest rate would be 5.5%. The prime rate varies from month to month, but the margin stays consistent throughout the loan.
Interest rates for both a securities-backed line of credit and a HELOC are typically far lower than credit card and personal-loan interest rates. That’s because SBLOCs and HELOCs are secured loans, while most credit cards and personal loans are unsecured. Secured debt is backed by collateral, so there’s less risk for the lender.
HELOCs have many of the same costs associated with getting a mortgage, including the cost of an appraisal, application fees, and closing costs.
|Portfolio Line of Credit||Home Equity Line of Credit|
|Backed by securities in an investment account||Backed by home equity|
|Typical borrowing limit is 50% to 95% of account’s value||Typical borrowing limit is 80% of equity|
|Can’t be used to buy securities or repay a margin loan||Can be used for any purpose|
|Often requires $100,000 account value||Usually requires minimum home equity of 15% to 20%|
A portfolio line of credit is backed by the securities in your investment account. If you don’t repay the loan as agreed or the value of your investments falls below a certain level, the lender can liquidate your assets. A home equity line of credit is backed by the equity in your home. Your lender can foreclose on the home if you default, and they can reduce or freeze your line of credit if your home value or finances change significantly.
You can typically borrow between 50% and 95% of your investment account’s value through a portfolio line of credit. Typically, firms will allow you to borrow between $100,000 and $5 million through a securities-backed credit line.
With a HELOC, lenders typically allow you to borrow up to 80% of your equity. They’ll also consider factors such as your credit and employment history, income, and debt to determine how much you can borrow.
Many firms have different limits based on the degree of risk the asset you’re borrowing against carries. For example, you may be able to borrow up to 95% if you're borrowing against U.S. Treasuries, but may be limited to 50% to 65% of the value of stocks.
You can use a portfolio line of credit for virtually any purpose, with a few exceptions. You can’t use it to buy securities or pay down a margin loan. HELOCs can be used for pretty much any reason, as well. However, under the Tax Cuts and Jobs Acts of 2017, you can only deduct HELOC interest you pay if you’re using it to expand or improve your home.
The rules for PLOCs vary by lender. Some firms won’t run a credit check or evaluate your liabilities, but instead will base their decision entirely on your portfolio’s value. Many firms also require your assets to have a market value of at least $100,000.
To get a HELOC, you’ll typically need at least 15% to 20% equity in your home. Lenders will also consider your debt-to-income ratio and credit score. You’ll be required to submit extensive paperwork. Expect to provide many of the same documents you would when applying for a mortgage, including pay stubs, W-2s, tax returns, and bank and investment statements.
Which Is Right for You?
A portfolio line of credit may be a good option to shore up liquidity if you have significant investments. By borrowing against assets, you can free up cash and continue to earn gains while avoiding capital gains taxes, since you aren’t selling assets.
However, with a PLOC, you should have cash set aside so you can deposit extra money in the event of a margin call. In a volatile market, investments can lose value quickly. If you face a margin call and you can’t immediately bring your account to the maintenance requirement, your broker can liquidate whatever assets it chooses, even if that means selling them at a loss.
A HELOC can also be a valuable tool for accessing home equity. It can be a valuable source of cash in an emergency or if you need to pay off debt.
A HELOC can also be a good source of funds for home improvements, since the interest you’ll pay is usually tax-deductible. However, make sure you can afford payments for any credit you take out, because a default could cost you your home.
The Bottom Line
A portfolio loan could result in substantial losses if you don’t have cash to satisfy a margin call after the market tanks. If unforeseen circumstances cause you to miss HELOC payments, your lender could foreclose on your home.
Portfolio lines of credit and home equity lines of credit can both help you free up cash without selling assets. They can also save you money, given that the interest rates are lower than you’d pay on a credit card or loan. But given the high stakes involved, it’s important to prepare for worst-case scenarios.
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Securities and Exchange Commission. “Investor Alert: Securities-Backed Lines of Credit.”
Consumer Financial Protection Bureau. “What You Should Know About Home Equity Lines of Credit.”
Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”