A portfolio line of credit (PLOC) is a collateralized loan against select investments from your portfolio. Your lender allows you to take out a loan by holding a specific percentage of your portfolio's value and uses it as collateral.
Learn what a portfolio line of credit is, its risks and benefits, and how it compares to other credit lines.
Portfolio Line of Credit Definition and Examples
A portfolio line of credit, also known as "securities-backed lending," involves using securities as collateral for loans to investors.
Lenders establish criteria for acceptable line-of-credit collateral. Eligible securities could be stocks or bonds, but they vary according how a lender values the offered securities.
The borrower deposits the approved securities into an account on which the lender has a lien. In general, lenders approve amounts that range from 50 percent to 95 percent of the collateral's market value.
PLOCs differ from other portfolio-based lending options. They are lines of credit (similar to credit cards or home equity lines of credit) that are continuously open as long as payments are current, and marginal value is maintained.
The exact amount loaned depends upon the value of the portfolio's underlying assets—the investor's valuation might be different from the lender's. For example, if you were inquiring about a line of credit, a lender might approve you for $100,000, based on the value of the stocks you offered.
However, after inspecting your portfolio, the lender might decide that you can receive a $190,000 line of credit if you offer $200,000 worth of U.S. Treasury notes as collateral instead.
- Alternate definition: A loan given to an investor based on the value of the securities offered to the lender as collateral
- Alternate names: Pledged asset line, securities-backed line of credit
- Acronyms: PAL, SBLOC, PLOC
How Does a Portfolio Line of Credit Work?
Once an investor is approved for a line of credit and have deposited collateral in the lender's account, they can access the funds. Generally, they can write a check against the line of credit or transfer the funds to a bank account.
As the value of the underlying collateral changes, the credit capacity of the account fluctuates.
If the investment instrument's value changes due to market conditions, the lender may require the borrower to deposit additional collateral—perhaps cash or other stocks and bonds, similar to maintaining a trading margin.
The borrower can also repay some or all of the outstanding loan balance. If payments do not begin within a certain period known as the “cure period”—which could range from two to 30 days—the lender has the option to liquidate (sell) the investor's collateral.
Individuals and joint investors can establish portfolio lines of credit. Revocable living trusts in which the trustee, trustor, and beneficiary are identical, are also eligible. Depending upon the financial institution, loans can begin at $100,000 and reach into the multi-millions for high net-worth accounts.
These loans have terms tailored to the borrower, with short and intermediate durations; five years is common.
Benefits and Risks of Portfolio Lines of Credit
They offer the borrower substantially lower interest rates.
Greater flexibility in repayment.
Provide a cure period to meet demands for additional collateral.
Low taxes for accessing your investments.
Market value of collateral assets can drop enough to cause significant debt,
All collateral can be lost without notice.
The lender can ask for additional collateral if the value of the assets being held drops.
Dividends from stocks in the account might go into the account.
- Lower interest rates: Compared to credit cards and traditional loans, portfolio lines of credit can have lower rates, because collateral is being held.
- Repayment flexibility: If an investor runs into trouble making payments, the lender can assist them by adjusting rates or payment terms.
- Cure period: The addition of a period where no payments are due helps investors plan for making payments.
- Reduced risk: For lenders, there is a reduced amount of risk. This reduction makes them more comfortable, because there is less chance of default.
- Low taxes: If you were to liquidate some of your investments, you would be hit with capital gains taxes. By taking out a loan, you access your assets without triggering taxes. Interest rates are lower than capital gains taxes.
- Market value drop: If the market makes a downward trend, your assets' value might go down as well. This not only could lead to the lender asking for more from you, but there is a risk of significant losses if the market drops far enough—the possibility of owing far more than you borrowed exists.
- Loss of collateral: The lender can sell your assets at any time, without notice, if they feel there is a risk to their principal, such as late payments or a decline in value.
- Additional collateral might be required: Known to traders as a "margin call," lenders can ask for more of your investments or cash to meet value requirements if investment values drop.
- Dividends: If you place a stock that provides dividends into the line-of-credit account, the dividends might be required to be routed to the account.
Another danger with securities-backed loans is that the lender might stop eing comfortable with specific securities serving as collateral, resulting in a margin call or a sell-off of the securities.
Portfolio Line of Credit vs. Home Equity Line of Credit (HELOC)
|Portfolio Line of Credit||Home Equity Line of Credit|
|Backed by your portfolio||Backed by your home|
|A loss can take your investments||A loss can take your home|
|Tax deductions on interest possible if the loan is used to purchase taxable investments||Tax deductible interest payments on qualified amounts|
|Not included on monthly credit reporting||Affects your credit score|
When a PLOC is granted, you use investments as collateral. With a HELOC, your home is the collateral. This can be dangerous, as instead of losing value in investments you could lose value and equity in your home.
The tax advantages are different, because you can claim deductions for interest on a HELOC if the funds are used for home improvements or repairs. In a PLOC, you might be able to claim some deductions if you're allowed to purchase taxable investments. Generally, this isn't allowed in a PLOC, so the tax gains you receive are limited to reducing capital gains when accessing your investment funds.
HELOCs are reported monthly to credit bureaus by the lender. PLOCs are different, because they use investments as collateral, and the lender can take them from you if the worst happens. PLOCs are not reported to the credit bureaus, so they don't affect your credit.
- Portfolio-backed lines of credit are loans that use investments as collateral.
- You lose control of your assets when you place them in a PLOC account as collateral.
- You must maintain a margin value, and the lender can sell your assets at any time if you miss payments or the value drops.
- PLOCs and HELOCs are similar but use different collateral. They are also taxed differently.
- You can access your investments with a PLOC and avoid capital gains taxes.
The Balance does not provide tax or investment advice or financial services. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.