How Do Investment Loans Work?

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Investment loans are a way for investors to borrow money against an investment, and most companies will only allow loans up to 50 percent of the total value. Understand how investment loans work, which usually charge a high interest rate, with investing advice from a certified financial planner in this free video on personal finance.

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Video Transcript

Today we are going to talk about how to make an investment loan. An opportunity that is out there for many investors is the ability to actually borrow money against an investment that you hold. One of the things that you might want to consider in doing that is how the process works. Many companies will allow you to do this and they generally will limit the maximum amount of your loan to about 50% the value of your investments. So for example if you have an investment portfolio that is valued at $50,000 many times you can borrow up to $25,000 against those investments. This is called margin. You borrow against the funds and incur a debt within the account. The investment company will charge you an interest rate to do that. It is generally a little bit higher than what you would pay to take out a loan at a bank. Currently you would probably be looking at between 6 and 8%. This is a fairly high interest rate. Some other things you might want to consider are to take out a loan at the bank, the interest on a home equity loan is generally tax deductible. A risk that you may incur if you borrow against investments is that if the value of your investments decreases you could receive what they call a margin call where you have to put more money in your account to make sure that your loan always remains at 50% of the value of your investments.

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