Stock based loans are programs that allow investors to pledge fully paid stock as collateral for non-recourse loans from third party lenders. Stock based loans are marketed by insurance agents, financial planners, investment advisers, accountants and attorneys. As a way to raise cash by customers, financial professionals offer stock based loans in order clients to buy other financial products. Customers can acquire stock based loans from financial professionals who sell without requiring the existing stocks of the clients.
In addition the stock based loans can be sold to clients for the purposes of buying new stock and borrowing against the stock to make another investment. Other investments that are done buying or borrowing stock based loans includes annuity.
Lasting of stock based loans is dependent on the features offered by different promoters. An investor pledges their stock as collateral to lenders to about ninety percent of all they have. Interest payment is based on the term of the loan lasts. Crediting of the dividends paid on the customer is based on the pledges made by the client. Clients are charged an interest rate of about ten percent and above which is considered to be high.
Upon the end of the stock based loan the client is provided with several options on what to do with the loan. Getting the stock back, walking away from downside losses, extending the loan and cashing any upside profits are the options provided to clients upon ending of their loan period. A client is able to get their stock by paying off the loan balance including the interest and less any dividend paid.
Clients are able to extend their loan by renewing their loan for an additional time period. During the end of the loan period clients are given the option of walking away from the downside losses. When the value of the pledge stock falls below the amount the customer owes then walking away of the client is allowed. In the process of walking away the client turns over the stock to the lender and keeps the money that had been loaned. A lender also faces a disadvantage as they can’t try to recover any of the loaned amount or interest from the customer. As the final option given to clients is cashing any upside profits this is because the value of the pledged stock has increased above the total amount due on the loan. The amount due on the loan also includes the interest.
Awareness of investors on the risks and considerations for stock based programs is checked. The risk and considerations include; premature sale of stock, possible tax consequences, failure to perform by the lender, availability of the funds to repay loan, unregistered sales, possible conflicts of interest, high cost and high interest charge among others.