Securities loan – High sums plus low interest rates?

If you deal with the subject of credit or the procurement of financial resources, you will eventually come across the so-called securities loan. This is not a loan that only serves to buy securities. The name “security loan” comes from the fact that securities are deposited as collateral.

The most important information on “Securities Lending” at a glance:

  • The mortgage loan amount can be between 50 and 90 percent of the securities account
  • Not all securities are accepted by all providers
  • The security loan may be earmarked
  • Not all credit providers accept external credit accounts
  • The borrowing rate is usually lower than other loans

How the securities loan works exactly and what the debtors should urgently pay attention, you will learn in the following guide!

1. What is a securities loan?

If you want to take out a security loan, it is a basic requirement to have securities. Similar to a mortgage loan, bonds, shares, certificates, mutual funds or precious metals are deposited as collateral in a securities loan. These securities must, of course, already be in the full possession of the borrower and may not originate from an open securities loan.

The mortgage amount

The amount of the mortgage loan depends on the type of securities. Depending on the stability of the securities, the mortgage loan amount may amount to up to 90 percent of the securities account. Secured securities such as government bonds fare better than gold, stocks or certificates. This has to do with the relatively large fluctuations in value that result in a constant revaluation of the loan. It must therefore be borne in mind that if the price is reduced sharply, the whole or at least part of the loan may have to be repaid immediately. Although this scenario is usually not available, it should not be forgotten.

The purpose of usage

Depending on the financial service provider, the loan for securities can only be used for the purchase of new securities or for free use. Although it is close to using securities loans also to stockpile the securities funds, but it comes to occasionally situations in life in which an unexpected investment in washing machine, car or a new boiler is pending. Theoretically, loan debt rescheduling can also be done with a Wertpaper. Exactly then, securities do not necessarily have to be sold, but can also be deposited as collateral. There are tips in our guide on debt repayment.

The expediency

But why exactly should one now deposit his securities as collateral? Can not you just pick up such a installment loan? Of course, that’s theoretically possible. However, there are two good reasons for a loan. First, it may be that the debtor is not granted a normal installment loan without collateral. Reasons for this may be a bad credit rating or negative private credit entries. Second, it is because of the given collateral that lower interest payments occur. The securities reduce the risk of insolvency. Should there be difficulties in repayment, the securities will pass into the creditor’s possession and no economic damage will result.

In a securities loan securities are deposited as collateral. The mortgage lending amount can be up to 90 percent of the securities account. Securities loans do not necessarily have to be used to buy new securities. A security loan is available for less interest due to the collateral provided.

2. Who offers a security loan?

Of course, the first port of call for credit is the bank. With the classic house bank, almost every form of financial product can be found. So, of course, the opportunity to acquire securities, manage, sell or even to lend. Banks must have a banking license in Germany and Europe in order to be allowed to work at all. This is awarded in Germany by the BaFin and the regulations are regularly reviewed.

These regulations are also subject to the online banks. Online banks are mostly offshoots or subsidiaries of house banks. In part, they specialize in certain financial products. This can then bring the advantage that the workflows are automated and the costs are significantly lower. This in turn has a positive effect on the amount of the borrowing rate. If even a fully automated online transaction takes place, it can sometimes come to bonus payments. Nevertheless, one can be sure even with these loans, that it comes to a detailed examination of the information provided. Finally, the ownership of the securities must also be proven here.

More credit can be found at online brokers. These specialize in securities trading and most often with other tradable options. Online brokers usually grant loans on more favorable terms, but also at the same time at a higher risk. In addition, the securities loans are usually mandatory earmarked and can only be invested in other securities. Online brokers are also overseen by European regulators, but these are mostly authorities in Malta or Cyprus. However, this does not represent an increased risk. As part of the European Union, they are subject to the same strict regulations and expert support as in Germany.

A security loan is issued by various providers

The securities loan is offered by house banks, online banks and online brokers alike. All of them are subject to the regulations of the European Union and are controlled by European supervisory authorities. The conditions vary from provider to provider. However, online brokers insist on using the loan for securities.

3. What to look for before concluding the loan agreement?

3. What to look for before concluding the loan agreement?

If you want to make a securities loan comparison on an online loan calculator, it is obvious to choose the provider with the cheapest borrowing rate, but this is often too short. The future debtors should also consider a few other things so as not to experience a rude awakening afterwards.

First there is the mortgage lending amount. As mentioned above, this can be up to 90 percent of the securities account. But be careful here. If you look at the matter, you can also roughly estimate which fluctuations your own papers are subject to. It is very important to consider the conditions and consequences, if the value of the depot suddenly sinks. Therefore, not only the generosity of the lenders, but also the actual performance must be respected.

Add to that the question of what type of securities you have and what kind of securities can be used by the securities lending provider. For example, financial futures or dividend-right certificates can be excluded from the loan. This decision is made by every financial service provider, so that no general statements can be made.

Another point is the level of borrowing rates compared to economic benefits. So it makes no sense to take out a loan for securities, if the expected profit is lower than the interest payable. On the other hand, the loan may have lower interest rates than other lending alternatives, so it may be more appropriate for new purchases to take out a loan of securities instead of an installment loan.

But all these considerations are null and void if it is not possible to use the securities accounts of other financial service providers for a loan. If this is not possible, the comparison with such service providers is obsolete. After all, it makes no sense to open a depot before lending it directly. In addition, the opening of a deposit is also made on grounds other than the loan. Sometimes it can be worthwhile to go to a direct negotiation with your own financial institution.

The decision criterion in the search for the appropriate security

If no external securities accounts are accepted, the provider can be sorted out

The search for the right provider of securities loans also includes the question of the right mortgages and the consequences of depreciation. In addition, the nature of the usable securities should also play a role. Also, the question of the economic benefits of the securities loan or whether external custody accounts can be used as collateral is of crucial importance.

4. Conclusion: Securities loans have their own decision criteria

A securities loan is offered by branch banks, online banks or online brokers. This is a loan secured by an existing securities account. Interested parties can find favorable conditions through a bank loan comparison 2019. The credit providers decide which type of securities is accepted, how high the lending sums are and whether the intended use is freely selectable or not. In this respect, a securities loan settlement is only too short on the basis of interest rates. Certainly, these criteria play an important role in terms of the economic benefits of a securities loan, but they can not be used as sole decision-making criteria.