The Portfolio Line of Credit (PLOC) and the Home Equity Line of Credit (HELOC) are both secured loans, meaning they are backed by assets. However, the PLOC uses your investment portfolio as collateral, while the HELOC uses the equity in your home.
What is the difference between a Portfolio Line of Credit and a Home Equity Line of Credit (HELOC)?
A Portfolio Line of Credit, also known as a Securities-Backed Line of Credit (SBLOC), is a type of margin loan that allows you to borrow money using your investments as collateral without having to sell them. A PLOC allows you to access a revolving line of credit with no maturity date. However, most PLOCs are demand loans, which means the lending bank can ask for repayment at any time.
You may face a margin call, where the bank may ask you to deposit more money if the value of your investment drops below a certain threshold. If you don’t deposit enough, the bank can sell some of your assets to meet account requirements.
On the other hand, a HELOC uses the equity in your home to create a line of credit. You receive a credit line that you can use and repay in much the same way as you would with a credit card. HELOCs often have a draw period of around 10 years during which you can borrow what you need up to a limit, followed by a repayment period that typically lasts about 20 years.
If you fail to repay the loan, you could lose your home and the equity you have built. The bank can also freeze or reduce the credit line on your HELOC if your home’s value declines significantly or if the bank believes you may default due to a substantial change in your financial situation. If that happens, you may be able to restore your credit line by obtaining a new home appraisal and providing copies of your credit reports.
Interest Rates
Both portfolio lines of credit and home equity lines of credit have variable interest rates. Most banks determine rates based on an index, usually the U.S. prime rate, plus a margin. For example, if the prime rate is 3.5% and you pay a 2 percentage point margin, your interest rate would be 5.5%. The prime rate changes from month to month, but the margin remains fixed throughout the life of the loan.
Interest rates for securities-backed lines of credit and home equity lines of credit are typically much lower than credit card rates and personal loan rates. This is because SBLOCs and HELOCs are secured loans, whereas most credit cards and personal loans are unsecured. Secured debt is backed by collateral, so there is less risk for the lender.
Collateral
A portfolio line of credit is backed by securities in your investment account. If you don’t repay the loan as agreed or if your investment values drop below a certain threshold, the bank can liquidate your assets. A home equity line of credit is backed by the equity in your home. The bank can initiate foreclosure on the home if you default, and it can reduce or freeze the HELOC if your home’s value drops or your financial situation changes significantly.
Loan Amount
You can usually borrow between 50% and 95% of the value of your investment account through a portfolio line of credit. Typically, companies allow borrowing between $100,000 and $5 million through a securities-backed line of credit.
For a HELOC, lenders usually allow you to borrow up to 80% of your home’s equity. They will also consider factors such as credit history, employment history, income, and debts to determine the amount you can borrow.
Purpose
You can
Using a portfolio line of credit for almost any purpose, with some exceptions. You cannot use it to purchase securities or pay off a margin loan. A HELOC can also be used for almost any reason. However, under the 2017 Tax Cuts and Jobs Act, you can only deduct the interest on the HELOC if you use it to expand or improve your home.
Approval Process
Rules for PLOCs vary from bank to bank. Some companies may not check credit or evaluate your obligations, but will base their decision entirely on the value of your portfolio. Many companies also require you to have assets with a market value of at least $100,000.
To obtain a HELOC, you typically need to have at least 15% to 20% equity in your home. Lenders will also consider your debt-to-income ratio, credit history, and credit scores. You will be required to provide many of the same documents you would provide when applying for a mortgage, including pay stubs, W-2 forms, tax returns, bank statements, and investment statements.
Which One is Right for You?
A portfolio line of credit may be a good option for enhancing liquidity if you have significant investments. By borrowing against your assets, you can free up cash and continue to earn returns without incurring capital gains taxes, as you are not selling the assets.
However, with a PLOC, you need to have reserved cash so that you can deposit additional funds in the event of a margin call. In a volatile market, investments can lose value quickly. If you face a margin call and cannot meet the maintenance requirements, your broker can sell any assets of their choosing, even if it means selling them at a loss.
A HELOC can also be a valuable tool for accessing your home equity. It can be a valuable cash source in emergencies or if you need to pay off debt.
A HELOC can also be a good source of funds for home improvements, as the interest you pay is usually tax-deductible. However, make sure you can afford the payments on any credit you take on, as defaulting could cost you your home.
Conclusion
Borrowing from a portfolio line of credit can lead to significant losses if you do not have enough cash to meet a margin call after a market collapse. If unexpected circumstances arise that cause you to miss HELOC payments, the bank could foreclose on your home.
Portfolio lines of credit and home equity lines of credit can help free up cash without selling assets. They can also save you money since interest rates are lower than what you would pay on credit cards or loans. But due to the high risks associated with them, it is important to prepare for the worst-case scenarios.
Would you like to read more content like this? Subscribe to The Balance newsletter for daily insights, analyses, and financial tips delivered straight to your inbox every morning!
Was this page helpful?
Thank you for your feedback!
Let us know why! Other
Sources:
Securities and Exchange Commission. “Investor Alert: Securities-Backed Lines of Credit.”
Consumer Financial Protection Bureau. “What You Should Know About Home Equity Lines of Credit.”
FINRA. “Securities-Backed Lines of Credit – It May Pay To See Beyond the Pitch.”
Federal Trade Commission. “Home Equity Loans and Home Equity Lines of Credit.”
IRS. “Interest on Home Equity Loans Often Still Deductible Under New Law.”
Source: https://www.thebalancemoney.com/portfolio-line-of-credit-vs-heloc-what-s-the-difference-5323697
Leave a Reply