The Procedures of Applying Stock Based Loans
When investors are allowed to pledge fully paid stock as collateral for non-recourse loans from third party lenders the programs are known as stock based loans. Financial planners, insurance agents, accountants, attorneys and investment advisers market stock based loans. Most financial professionals offer stock based loans by as a way to raise cash for customers in order to buy other financial products. Stock based loans sold by financial professionals don’t require customers to sell their existing stocks.
Stock based loans are sold to clients as either borrowing against the stock to make another investment or buying new stock. Either by buying or borrowing stock based loans an example of an investment is annuity.
Lasting of stock based loans is dependent on the features offered by different promoters. Pledging of stock by investors is done as collateral to lenders to almost ninety percent of all they own. However this based on a set period of time in which the client also pays interest. 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.
Several options are provided to clients when the stock based loan period ends. Clients are provided with the following options when the term period of their stock based loan is over; getting the stock back, walking away from downside losses, extending the loan and cashing any upside profits. By paying off the loan balance including the interest and less any dividend paid then the getting of the stock by a client is made possible.
Another option is extending the loan as customers are allowed to renew the 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. The client turns over the stock to the lender and keeps the money that had been loaned. Lenders can’t try to recover any of the loaned amount or interest from the customer. When the value of the pledged stock increases the above the total amount due on the loan then clients cash the upside profits. Interest is also considered as an amount due on the loan that needs to be cleared before cashing of upside profits.
Awareness of investors on the risks and considerations for stock based programs is checked. Investors needs to consider the following risks; 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.