If you are new to finance you soon learn that there are different forms of credit open to businesses and individuals.
One form of credit that is becoming quite popular is the portfolio line of credit.
A portfolio line of credit also known as PLOC is a credit facility that is backed by a borrower’s investment portfolio that includes mutual funds, bonds, and stocks.
On that note, here’s all you need to know about the portfolio line of credit, its characteristics, pros, and cons.
Characteristics Of PLOC
Compared to traditional loans where you are provided with a particular amount of money and are required to pay back in fixed installments, PLOC gives room for more flexibility.
You are allowed to borrow and pay back at your earliest convenience, paying interest only on the specific amount you borrow.
Variable Interest Rates
PLOC comes with a highly volatile interest rate that fluctuates with the market. This means that over time, your interest rates may vary, making it difficult to have a long-term budget plan.
To use PLOC, you will be required to offer some form of collateral such as your home, stocks, or other valuable assets to secure the loan, this is why it is referred to as a secured loan.
This collateral provides the lender with a sense of security and reduces their risk of loss.
For instance, with Sofi margin lending, you can use your stocks and other securities as collateral to receive a line of credit you can use to grow your portfolio.
Most times, PLOCs come with an option to renew your plan. This permits you to keep borrowing from the credit line even after paying the outstanding balance.
You will find this feature helpful if you have regular expenses such as home innovations or hospital bills.
Higher Interest Rates
Although PLOC offers greater flexibility compared to traditional loans, they also come with higher interest rates, making them a more costly form of credit.
It is crucial to put this into consideration before proceeding to apply for a PLOC.
Advantages Of A Portfolio Line Of Credit
Lower Interest Rates
One of the major benefits of a PLOC is that you have access to lower interest rates compared to traditional loans or when you use a credit card.
The interest rates are connected to the prime rate which banks charge their most creditworthy customers. This way, PLOCS offers very low-interest rates to customers compared to traditional loans with the use of credit cards.
Higher Flexibility In Repaying Loans
Another benefit of a Portfolio Line of Credit is that borrowers have higher flexibility when repaying their loans as there is no fixed schedule for repayment.
You can easily pay at your own pace and on your terms as there are no minimum payments or penalties for early payments.
This way, you can choose to make interest-only payments or pay down the balance faster to clear all debts.
Easy Access to Funds
Very similar to credit cards, a PLOC gives you easy access to funds.
Borrowers have full access to the funds in their PLOC by writing checks or sending money to their checking accounts for easy withdrawal.
This serves as a great option for those who are always in need of quick cash.
Zero Repayment Penalties
PLOCs come with zero repayment penalties compared to traditional loans.
This way, borrowers can pay down their balance at their convenience without incurring extra fees.
Cons Of A Portfolio Line Of Credit
A major drawback of using a Portfolio Line of Credit is that your portfolio can be in danger of being at risk.
A PLOC is a type of loan that is secured, this means that it is backed by your portfolio of securities.
If the value of your portfolio drops, there is a huge change that you will need to deposit extra funds into your account to keep up with the required loan-to-value ratio.
Potential For Margin Calls.
Another downside to using a PLOC is that it comes with the prospect of margin calls.
Margin calls occur when the value of your portfolio appreciates to a point where you no longer meet the loan-to-value ratio.
This will result in you making a deposit of extra funds into your account or selling securities to restore your loan-to-value ratio to its required state.
Making use of a PLOC can limit your liquidity. When using a Portfolio Line of Credit, you are keeping aside a portion of your portfolio as collateral.
This means that you may have limited or no access to the funds you kept aside and they cannot be used to serve other purposes such as emergency expenses.
Fees such as origination or annual fees are usually on the high side when it comes to PLOCs.
These fees can gather quickly and increase the cost of borrowing significantly. It is crucial to carefully investigate the fees associated with a PLOC before deciding that it is the right financial instrument for you.