The Financial Industry Regulatory Authority and the Securities and Exchange Commission’s’ Office of Investor Education and Advocacy has issued an investor alert recommending that investors get to know the risks before deciding to invest in securities-backed lines of credit, also known as SBLOCs. Although SBLOCs can be a major revenue for securities firms, there is the chance of increased losses, especially during times of market volatility.
Securities-backed lines of credit are loans that let an investor borrow money using securities that are kept in an investment account as collateral. An SBLOC allows an investor make interest-only payments each month and loans stay outstanding until they are repaid.
SBLOCs are frequently marketed as a low-cost, easy way to gain access to additional money without having to liquidate securities even as an investor borrows against assets in an investment portfolio. However, they come with certain risks, including unintended tax consequences and the possibility that an investor might have to sell his/her holdings, which could affect long-term investment goals.
SBLOCs are similar to home equity credit lines except that they involve securities as collateral rather than the home. An investor is allowed to repay part or all of the outstanding principal at any time and then borrow again in the future.
An SBLOC is a non-purpose loan. This means that the investor is not allowed to use the proceeds to buy or trade securities. However, money from an SBLOC can be utilized to finance almost anything you want, including home renovations, education expenses, or personal travel.
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