September 27, 2023

Secured Lines of Credit

Secured Lines of Credit

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.


Understanding Secured Lines of Credit

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.


Examples of Using Secured Lines of Credit in Financial Planning

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%.


Pros of Secured Lines of Credit

  1. The biggest benefit of having a secured line of credit in your plan is flexibility. As stated above, if you have a stock-based / portfolio-based line of credit, you can flexibly tap into this capital without having to worry about selling an investment at a loss or paying a tax on a stock sale. This helps to remove market timing concerns and tax concerns on all non-qualified assets for short-term needs.
  2. Secured lines of credit often come with lower interest rates compared to unsecured loans, making them a more cost-effective borrowing solution.
  3. Easier Approval: Collateral reduces the lender’s risk, making it easier for individuals with less-than-perfect credit histories to secure a line of credit.


Cons of Secured Lines of Credit

  1. Risk of Asset Loss: The primary downside is the potential loss of the pledged asset if you default on the loan.
  2. Interest Costs Over Time
  3. Temptation to Overspend: The accessibility of credit can lead to overspending and financial mismanagement if not used prudently.



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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