The Key Differences Between Securities Lending and Stock Loans
September 15, 2021
Bank loans fall through sometimes due to stringent credit scores, income, and other requirements. Lack of valuable collateral, such as an automobile, real estate, or equity in a house, is one of the most common reasons why most banks are reluctant to grant loans to individuals or businesses looking for some extra finances.
When this happens, you might feel frustrated with bad news pertaining to constant rejection after rejection for your loan application. Don’t worry; all is not lost. You still have the option of borrowing money through stocks or securities lending.
But aren’t these both different names for the same concept? No! Many borrowers often confuse these alternatives, but there’s a notable difference between the lending process of securities lending and stock loans. Read on to learn more.
The securities lending process involves borrowers using security or cash as collateral, i.e. the temporary lending of stocks. Investors looking to capitalize on the market use short-selling securities. As the temporary owner, the borrower first sells the security and then buys it back cheaper. Lenders make money via the fees while retaining security ownership at the end of the financial transaction. The borrower benefits by earning income during the buying and selling.
Stock-based loans are granted by financial institutions and funded by lenders using shares of stock as collateral for the loan. Using stock loans, borrowers can easily access liquid assets, buy real estate, and use the money for investments. The loan amount is determined by various metrics, such as the quantity of shares pledged and the loan length. There are two types of stock loans.
#1 Unsecured Stock Loan
These don’t require any collateral, which makes them similar to bond-based loans. They also have set pay-off dates and fixed returns. In case the borrower defaults due to any reason, the lender has no claim on their assets. These loans are further divided into irredeemable and convertible. Irredeemable unsecured stock loan doesn’t allow for a cash redemption, but it will enable borrowers to gain access to new capital in the stock market. On the other hand, Convertible loans automatically get converted into equities at the set expiration date of the loan.
#2 Secured Stock Loan
Secured stock loans are non-recourse loans that require borrowers to use shares of stock or financial assets as collateral to acquire the loan. Most lenders allow borrowers to take out as much as 70% of the amount or value of the pledged stock.
When stocks are the sole collateral pledged against the loan, it helps borrowers protect other personal possessions. In case of a default, borrowers don’t lose any assets other than the pledged stocks. Also, if the value of stocks declines, they’re free to walk away from the loan repayment because non-recourse loans don’t have any obligatory personal liability requirements for repayment.
We work with major stock exchanges worldwide, serving as a reliable non-recourse loan provider offering a wide range of loan services for clients across the Philippines, Malaysia, Singapore, New Zealand, Japan, Australia, South Africa, and Indonesia, among others.
Connect with us at 559-355-3368 or email us to learn more about acquiring personal loans and high-net-worth loans for yacht financing, private jet loans, and more.
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