Fidelity Investments: Loan Options And Opportunities

Fidelity Investments offers margin loans, which are loans borrowed against the value of securities you already own. Margin loans can be used to borrow extra money for short-term financing or buying more securities. The amount that can be borrowed varies depending on the investments held, but it is typically 30% to 50% of the total portfolio. Margin loans typically come with maintenance requirements, meaning that the account needs to retain a minimum value after the funds have been used. If the value of the securities falls below this level, more money must be deposited into the account, or the brokerage firm may sell stocks, potentially triggering capital gains.

Margin loans

Fidelity Investments offers margin loans, which allow you to borrow against the value of securities you already own. Margin loans can be used for a variety of reasons, both investment and non-investment, and can be a convenient way to access funds.

• Amplified losses if the securities in your account decline in value
• Margin calls or liquidation of securities
• Losses greater than the original investment
• Rising interest rates, increasing the cost of your loan

It is important to carefully review your investment objectives, financial resources, and risk tolerance to determine if a margin loan is an appropriate borrowing mechanism for you.

Line of credit against investments

Fidelity Investments does offer loans against investments, in the form of margin loans.

A margin loan allows you to borrow against the value of securities you already own. It's an interest-bearing loan that can be used to access funds for a variety of investment and non-investment needs. The interest rate for a margin loan is variable and depends on the amount being borrowed, but it is typically lower than unsecured lending options such as credit cards.

Here's how it works:

How a Margin Loan Works

When you take out a margin loan, you are borrowing against the value of your securities portfolio. The larger your portfolio, the larger the amount you can borrow. The money borrowed can be used for various purposes, such as funding a home improvement project, educational expenses, or buying more securities.

Like a regular loan, you'll pay interest on the borrowed amount. The interest rate is typically variable and fluctuates with the prevailing interest rate. There is no preset repayment schedule, so you can pay back the loan at your own pace. However, any unpaid balance will continue to accrue interest until it is paid off completely.

It's important to note that the amount you can borrow depends on the type and value of your eligible securities, which may fluctuate over time. You will also need to consider the ongoing maintenance requirements, also known as margin calls, which require you to maintain a certain level of equity in your margin account. If you fail to meet these requirements, the broker may sell your investments to protect itself.

Pros and Cons of Margin Loans

Margin loans can provide several benefits, such as:

• No credit check required
• Lower interest rates compared to other forms of borrowing
• No set repayment schedule, minimum payments, or early payment penalties
• Interest costs may be tax-deductible

However, there are also risks associated with margin loans:

• High degree of risk: If the value of your portfolio falls below the minimum maintenance requirement, you will need to raise equity in your account to meet a margin call. Failure to do so may result in the broker selling your investments without your consent.
• The broker may increase the minimum required equity at any time.
• Variable interest rates can increase at any time, especially during rising interest rate periods.
• Overleveraging: Borrowing too large a percentage of your portfolio value can lead to increased risk.

Whether a margin loan is suitable depends on your financial situation and risk tolerance. It can be a good option if you can control your spending and don't have a tendency to overleverage your brokerage account. However, it's important to carefully manage your borrowings to avoid letting them grow to exorbitant levels.

Additionally, it's worth considering establishing a margin loan as a backup option, even if you don't intend to use it immediately. Having multiple borrowing options can be beneficial in case of unexpected expenses.

Borrowing against home equity

With a HELOC, you only pay interest on the amount you borrow until the fixed repayment period ends, and interest rates are generally well below those of credit cards. However, interest payments on HELOCs are generally not tax-deductible unless you are using the funds to build or improve the home that is backing the loan. HELOCs are usually floating or variable-rate loans, so your borrowing costs could rise, especially in a rising-interest-rate environment. You'll need to apply for the loan, which could take several weeks, and there may be application and ongoing fees. If you fail to make payments, your home could be at risk.

A home equity loan is useful when you know the specific amount of money you need. With this type of loan, you can borrow a lump sum against the equity in your home, paying back the loan at a designated interest rate over a fixed period. You will enjoy the convenience of a fixed monthly payment and interest rate, and the opportunity to borrow up to 100% of your home's value. There may be potential tax benefits through deducting interest paid, but you should consult your tax advisor.

401(k) loans and withdrawals

A 401(k) loan or withdrawal can be a good way to get access to cash in an emergency. However, it's important to understand the pros and cons of each option and the alternatives. Every employer has different rules for 401(k) withdrawals and loans, so it's important to check what your plan allows.

K) Loans

A 401(k) loan lets you borrow money from your retirement savings and pay it back to yourself over time, with interest. The loan payments and interest go back into your account. Depending on what your employer's plan allows, you could take out as much as 50% of your vested account balance or $50,000, whichever is less. An exception to this limit is if 50% of the vested account balance is less than $10,000: in this case, you can borrow up to $10,000. You'll have to pay that money back, plus interest, within 5 years of taking the loan, in most cases.

Pros

• You don't have to pay taxes and penalties when you take a 401(k) loan.
• The interest you pay on the loan goes back into your retirement plan account.
• If you miss a payment or default on your loan from a 401(k), it won't impact your credit score because defaulted loans are not reported to credit bureaus.

Cons

• If you leave your current job, you might have to repay your loan in full in a very short time frame.
• If you can't repay the loan for any reason, it's considered defaulted, and you'll owe both taxes and a 10% penalty on the outstanding balance if you're under 59 and a half.
• You'll lose out on investing the money you borrow in a tax-advantaged account, so you'd miss out on potential growth that could amount to more than the interest you'd repay yourself.

K) Withdrawals

A 401(k) withdrawal permanently removes money from your retirement savings for your immediate use, but you'll have to pay extra taxes and possible penalties. Depending on your situation, you might qualify for a traditional withdrawal, such as a hardship withdrawal. The IRS considers immediate and heavy financial need for hardship withdrawal: medical expenses, the prevention of foreclosure or eviction, tuition payments, funeral expenses, costs (excluding mortgage payments) related to the purchase and repair of a primary residence, and expenses and losses resulting from a federal declaration of disaster, subject to certain conditions.

Pros

You're not required to pay back withdrawals of 401(k) assets.

Cons

• Hardship withdrawals from 401(k) accounts are generally taxed as ordinary income.
• A 10% early withdrawal penalty applies on withdrawals before age 59 and a half, unless you meet one of the IRS exceptions.

Alternatives to 401(k) Loans and Withdrawals

• Using HSA savings, if it's a qualified medical expense
• Tapping into emergency savings
• Transferring higher interest credit card balances to a new lower (or zero) interest credit card
• Using other non-retirement savings, such as checking, savings, and brokerage accounts
• Using a home equity line of credit or a personal loan
• Withdrawing from a Roth IRA—contributions can be withdrawn at any time, tax- and penalty-free

Fidelity's Fully Paid Lending Program

The program is voluntary and allows clients to lend out their securities in return for collateral in cash, securities, or both, held at a custodial bank independent of Fidelity. The collateral is equal to at least 100% of the value of the loaned shares, and an interest rate-based lending fee is paid for each security borrowed. This income accrues daily and is credited to the client's account monthly.

Clients can terminate the loan at any time by selling the loaned shares or recalling the loan and requesting that the loaned shares be returned.

Fidelity identifies securities that may be hard to borrow due to demand for short selling, scarce lending supply, or corporate events that could affect the liquidity of a security. It then determines which securities it wants to borrow.

There are several risks associated with the Fully Paid Lending Program. Shares on loan are not covered by the Securities Investor Protection Corporation (SIPC). Additionally, in any securities lending transaction, counterparty default is a risk. Clients also relinquish their voting rights, and dividends are paid as cash-in-lieu payments, which may have different tax consequences than actual dividends. Finally, short-selling activity may impact the price of the security.

Frequently asked questions