Wealth-based lending provides a financial solution for individuals with substantial assets but limited liquid cash—often described as being “asset-rich but cash-poor.” This lending type lets borrowers use investments such as publicly traded stocks, bonds, or real estate as collateral to secure lines of credit or loans. Unlike traditional loans that rely primarily on income verification and credit scores, wealth-based lending focuses on the quality and value of assets.
How Wealth-Based Lending Works
To obtain a wealth-based loan, you typically present your portfolio or asset details to a lender, often a private bank or brokerage lending division. They evaluate your assets’ current market value and establish a loan-to-value (LTV) ratio, which is the percentage of asset value they’re willing to lend—frequently between 50% and 70% for liquid securities. For example, a $1 million stock portfolio with a 60% LTV could allow a loan of up to $600,000.
Loans are commonly structured as securities-based lines of credit (SBLOCs), offering flexibility because you only pay interest on the amount drawn, not the full line. These loans usually feature variable interest rates tied to benchmarks like the Secured Overnight Financing Rate (SOFR) plus a lender margin.
Benefits and Typical Uses
Wealth-based lending is popular among high-net-worth individuals, retirees, and business owners needing liquidity without triggering capital gains taxes from asset sales. Common uses include:
- Making large purchases, such as luxury real estate or collectibles
- Bridge financing for home purchases pending sale of current property
- Funding business ventures or investment opportunities
- Covering large tax bills resulting from stock option exercises or other income spikes
This method preserves your investment portfolio’s growth potential while supplying necessary funds.
Risks to Consider: Margin Calls
The primary risk in wealth-based lending stems from asset value fluctuations. A decline in market value can increase your loan-to-value ratio beyond your lender’s limit, prompting a margin call. You must then either inject more collateral or repay part of the loan. Failure to do so may result in the lender liquidating your assets—sometimes at an unfavorable time, locking in losses—as noted by FINRA (source).
Wealth-Based Lending vs. Traditional Loans
| Feature | Wealth-Based Lending | Traditional Lending |
|---|---|---|
| Primary Evaluation | Asset value (stocks, bonds, real estate) | Income, employment history, credit score |
| Collateral | Required (investment assets) | Often unsecured or tied to specific property |
| Ideal Borrower | Asset-rich individuals with less predictable income | Borrowers with steady income and credit |
| Risk | Margin calls due to asset value drops | Payment defaults affecting credit scores |
| Approval Speed | Usually faster (days) | Can take several weeks |
How is Wealth-Based Lending Different from Margin Loans?
While similar, wealth-based lending and margin loans differ in purpose. Margin loans are used specifically to purchase additional securities on margin through a brokerage. Wealth-based loans, like SBLOCs, can be used for broader expenses but generally exclude funding more securities purchases. Interact with our glossary page on margin loans to understand margin concepts in detail.
Additional Considerations
Not all assets qualify as collateral; lenders prefer liquid, easily valued assets such as publicly traded securities over illiquid holdings like private company shares or collectibles. Interest rates generally vary and are not fixed, typically linked to benchmark rates with a lender-specific margin.
For comprehensive understanding and managing risks related to securities-based lending, consult authoritative sources like FINRA’s guide on securities-based lines of credit.
By leveraging wealth-based lending thoughtfully, asset holders can access needed cash without disrupting long-term financial plans or triggering unnecessary tax events.