- December 14, 2018
Watch Your Dreams Take Shape With Another Option To Build Wealth
Traditional financing methods (getting a loan through a commercial bank) can be difficult with long wait times, loads of paperwork and red tape. Additionally, high-interest rates can result in hefty monthly payments which can impact your cash flow. Margin loans can provide an alternative with liquidity and the financial freedom needed to help you achieve your goals and build wealth.
What Are Margin Loans?
A margin loan lets you borrow money and uses your shares or managed funds as security.
This financial transaction works similarly to a consumer loan as the client borrows a percentage of the total value of what (he or she plans) to purchase. If the margin loan is managed properly, clients can reap the benefits as they are able to borrow towards purchasing more shares while expanding their portfolios.
Benefits of Margin Loans
Margin loans used for purchasing shares or similar can lead to clients doubling their initial investment allowing them to pay off their loan and reinvest the profits. The key to gaining a maximum return lies on the ability of the investment to outperform the loan. Clients who make this investment will be using a highly liquid form of investment and lending.
Other pros to margin loans are faster and hassle free application process, low interest rates and no fixed repayment terms. Margin loans, in some cases, can also offer no commitment fees and allow investors to use the funds for any purpose. There are options to increase investment opportunities, pay down higher interest debts and other uses which should be discussed with a financial advisor to see if a client qualifies.
Risks of Margin Loans
As with any investment, there is a degree of risk and margin loans are no different. One of the biggest risks on this type of loan is the possibility of losing money if the collateral investment (I.e. share or bond) price falls. Advisors can make a “margin call”, this happens when the collateral falls to a point below the value of your loan. There are only two solutions to this issue: the client will have to release more security or repay the loan. This can lead to financial losses or the client being forced to pay off the loan in a shorter period of time.
Be Smart With Your Investments
As with any loan, don’t over extend yourself by borrowing more than you need. Other financial tips include paying the interest on the margin loan even though monthly payments are not mandatory or discussing with your advisory if the interest from your collateral investment will be enough to do this. Finally, it’s always a good idea to have additional money saved to respond in the event of margin calls.
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