When it comes to financial planning, having the right credit tools at your disposal is a crucial consideration. Traditional loans and credit cards might not always provide the flexibility and favorable terms you need. This is where secured lines of credit potentially come into play. In this blog, we discuss secured lines of credit, provide examples of their practical applications in financial planning, and lastly offer some pros and cons to be aware of before implementing.
Secured lines of credit, also known as secured credit lines or secured loans, are financial products that require borrowers to pledge an asset, known as collateral, as security for the credit extended. Collateral can take various forms, including real estate, vehicles, investments, or cash value life insurance policies. Lenders use this collateral as a safety net, ensuring that if the borrower defaults on the loan, they can recoup their losses by seizing the pledged asset.
Home Equity Line of Credit (HELOC): One of the most common examples of a secured line of credit is a HELOC, which allows homeowners to leverage the equity they’ve built up as collateral to secure a line of credit. Banks generally apply a loan-to-value (LTV) ratio to determine how much equity you can access through a HELOC. The amount you may qualify for will vary from bank to bank, but generally, this is anywhere from 60 – 80% of home equity.
Stock-Based Line of Credit: A diversified investment portfolio can potentially be used as collateral to secure a line of credit. This provides flexibility as you can access the funds without worry of capital gains tax or whether you are selling at a “good time” (gain or loss). You can expect the line of credit to be approximately 50 – 60% of the investment portfolio value.
Cash Value Life Insurance Loan: Another potential option is to use the cash value within a life insurance policy as collateral to secure a line of credit. This can be particularly useful for managing unexpected expenses, supplementing retirement income, or funding education, all while preserving life insurance coverage. Similar to HELOCs, lenders may use a loan-to-value ratio to determine how much of the cash value you can borrow. This ratio can vary, but it’s typically a percentage of the available cash value, often ranging from 70% to 90%.
Secured lines of credit offer unique opportunities for individuals and investors to access funds and manage their finances more effectively. As with any financial strategy, it’s crucial to weigh the pros and cons, align these tools with your financial goals, and seek guidance from a financial advisor to make informed decisions that cater to your specific circumstances.
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* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
* Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity, and redemption features.
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* The Dow Jones Global ex-U.S. Index covers approximately 95% of the market capitalization of the 45 developed and emerging countries included in the Index.
* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
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* The Bloomberg Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
* The DJ Equity All REIT Total Return Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
* The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stock of companies maintained and reviewed by the editors of The Wall Street Journal.
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* International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* The risk of loss in trading commodities and futures can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage is often obtainable in commodity trading and can work against you as well as for you. The use of leverage can lead to large losses as well as gains.
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* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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* Consult your financial professional before making any investment decision.
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