How To Use Stocks And Bonds As Collateral For A Loan

The federal government regulates the use of stocks and bonds as collateral for loans. There are limits on what securities can be used and how much can be borrowed against their value.

• Any stocks and bonds to be used must be freely salable and unrestricted.
• Stocks: If listed on the New York or American Stock Exchange, must have a market value of $5 or more per share. If the stock is an over-the-counter stock (not listed on one of the exchanges,) the market value must be at least $10.

The following chart lists the maximums that can be advanced against different types of securities.

If the value of the stock decreases, the brokerage firm will ask you to put up more money so the loan does not exceed the permitted maximum. For instance, if the stock on the New York Stock Exchange is worth $100 a share, and you own 10 shares (a total of $1,000) you can borrow up to 70% or $700. If the value of the stock goes down, the amount of the loan increases as a percentage of the value of the stock. So, if the stock goes down to $700, then your loan equals 100% of the total. You will have to come up with more money -- or the brokerage will sell your stock.

Most brokerage houses will notify you before they sell your stocks or bonds (it's known as a "margin call.") However, they are not required to notify you. Ask your broker to be informed before a sale occurs.

For any stocks and bonds not included on the list, or to secure a loan in a greater amount than permitted by commercial lenders, you will need to locate a friend or relative willing to make the loan.

NOTE: Before entering into this type of loan, pay attention to the costs including originaition fees and fees on repayment, if any. Check with your accountant about any possible tax consequences.

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