For investors who need liquidity but want to avoid capital gains taxes or exiting the market, there’s another route: borrow against your portfolio instead of selling the stocks and ETFs in your account. Using leverage instead of outright sales means you don’t have to pay capital gains tax or forgo market exposure and dividend income on the shares you’d otherwise sell.
Borrowing against your stocks instead of selling them might be optimal for your situation — but it could be a big mistake if you take a loan without a plan to pay it off. Here’s how to borrow against your portfolio, when you should, and when you shouldn’t.
These loans go by a few names. A securities-backed line of credit (SBLOC) is the general term, but it may go by other names depending on where your account is held. For example, Schwab calls it a pledged asset line. Whatever the label, the idea is the same — your investment account serves as collateral, similar to how a home secures a home equity line of credit.
How Borrowing Against Your Stock Portfolio Works
When you take a securities-backed line of credit, you pledge the assets in a taxable brokerage account and borrow against their value. You still own the investments and receive dividend income.
Approval is usually fast, with no application or origination fees, and the process is much simpler than a traditional loan, since the collateral is liquid and the valuation clear. Programs vary, and not every borrower or every security qualifies. Retirement accounts generally can’t be pledged. Eligible holdings are typically stocks, mutual funds, and ETFs, and you can often borrow a meaningful percentage of the account value.
But if you borrow too much and the account value drops, the lender can issue a collateral call. You may have to add cash or securities to the account or pay down the balance quickly. If you don’t, the firm can sell investments in your account to cover the shortfall — and they typically decide what to sell, without needing your approval.
Ask the financial institution how their specific program works. Understand the rates, whether there’s a minimum draw, how repayments work and when you need to make them.
As with any loan, what a lender will let you borrow isn’t the same as what you should take out.
When it May Make Sense to Borrow Instead of Sell
A line of credit against your investments tends to work best as a short-term or bridge solution, not typically as a permanent, revolving form of financing. Here are a few examples of when it may make sense to get liquidity from borrowing against your portfolio instead of selling out of it:
- Bridging a home purchase. Buyers who need money for a down payment before their current home sells can use a portfolio line of credit to avoid selling investments to buy the new house. When the old home sells, a portion of the proceeds can pay off the asset-based loan.
- Waiting on an imminent liquidity event. If cash is coming from upcoming sales of company stock or the sale of a business, a line of credit can cover the gap if there’s a timing mismatch between when you need liquidity and when you have it. Shares subject to a post-IPO lockup usually cannot be used as collateral until the restrictions lapse.
- Buying more time to diversify. For individuals with concentrated stock positions, diversification can take time. Between managing taxes and stock price volatility, there are reasons why someone might not want to sell everything outright, even if they need some extra cash.
- A large one-time expense. Tax bills, a renovation, or other major purchase, where liquidating would mean an avoidable tax hit. However, without a windfall coming, you’ll want to make sure you can pay off the loan from cash flow (typically in 12-18 months) or plan to use the SBLOC to delay sales in your portfolio until the next tax year.
The Benefits
Tax savings. The biggest draw is not realizing capital gains. Borrowing lets you access cash without selling appreciated shares. The interest may also be tax-deductible depending on how the funds are used, subject to the usual limits.
Staying invested. You keep your market exposure and avoid being forced to sell everything at once, possibly at a bad time.
Flexibility. Payments are usually interest-only, so you can repay on your own timeline — pay it off when a liquidity event happens, refinance into a traditional mortgage later if rates drop, or just buy more time to liquidate from your portfolio.
The Risks
Borrowing against your brokerage account carries risks a regular loan doesn’t.
Market volatility. If the value of your pledged account falls, the lender can require you to add collateral or pay down the balance, sometimes on short notice. Concentrated or volatile holdings raise that risk and can affect how much you’re allowed to borrow.
Rates. Interest rates are also variable. A securities-backed line of credit is typically priced as a spread over the Secured Overnight Financing Rate (SOFR), so your interest expense moves with rates. It’s one reason that SBLOCs can be good short-term tools.
Easy access. A portfolio loan is a quick way to access cash and the repayment terms are often very flexible. These are features, but only for disciplined investors.
Other Ways to Get Liquidity Without Selling Today
A portfolio line isn’t the only option. There are various ways to use home equity when buying before selling as well as other options to get liquidity from stocks you own (such as a collar advance or selling covered call options). Ask your financial advisor about these strategies and other potential solutions and discuss the pros and cons. The right choice depends on fees, interest rates, your timeline, the alternatives, and the rest of your financial picture, so it’s important to get advice specific to your unique situation.
Is It Better to Sell Stocks or Take a Loan From Your Portfolio?
Borrowing against your portfolio can be a financially savvy way to raise cash without selling appreciated investments or sacrificing market exposure. But it introduces risks that selling doesn’t, so it’s not always the right answer. Talk through your options with your financial advisor before pledging your portfolio, and make sure the loan fits into the rest of your strategy and financial situation.
Kristin McKenna, CFP®, is the President of Darrow Wealth Management and a Forbes contributor. Examples in her articles are generic, hypothetical and for illustration purposes only and should not be misinterpreted as personalized advice of any kind or a recommendation for any specific investment product, financial or tax strategy. This general communication should not be used as the basis for making any type of tax, financial, legal, or investment decision. If you have questions about your personal financial situation, consider speaking with a tax and financial advisor.
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