Robinhood's Loan Offerings: What You Need To Know

Robinhood is an online brokerage firm that offers loans to its customers to buy stocks, options, or other securities. The company touts its willingness to lend money to customers so they can multiply their returns, even likening investing with borrowed money to the thrill of riding a motorcycle. Robinhood charges $5 a month to borrow up to $1,000 for investment purposes, and for anything above $1,000, investors have to pay an annual interest rate on the loans. In 2020, Robinhood wrote off $42 million worth of stock loans that customers failed to repay, and the company's financial filings suggest that their margin loans are riskier than those of its competitors.

Robinhood offers loans to buy stock

Robinhood's mission is to "democratize finance" and it highlights margin loans as a way for customers to trade like professionals. The company states that buying on margin offers customers "more flexibility, extra buying power and less time waiting to access their accounts".

However, margin loans can be risky. Financial planners and advisers have warned against buying stocks on margin, as it can quickly lead to unexpected losses that exceed the original investment. In 2020, Robinhood wrote off $42 million worth of stock loans that customers failed to repay, and the company's financial filings suggest that their margin loans "are riskier than those extended by its peers". Regulatory filings show that investors who borrowed money from Robinhood were nearly 14 times more likely to be unable to repay the loans than investors who borrowed from rival brokerages.

Despite the risks, Robinhood has rapidly expanded its business of extending loans to customers in the run-up to its initial public offering. The company's lending to help customers buy stock on margin rose by $2 billion in the second half of 2020.

Robinhood's loans are 14 times more likely to default

Robinhood is a stock-trading app that offers loans to customers to buy stocks, options, or other securities. The company calls this "buying on margin" or "margin investing", where customers can borrow money from Robinhood to invest in stocks. This allows customers to invest more money and potentially make greater gains or losses.

Robinhood charges $5 a month for users to borrow up to $1,000 for investment purposes. For anything above $1,000, investors have to pay an annual interest rate on the loans. In December 2020, Robinhood halved the annual interest rate from 5% to 2.5%.

However, Robinhood has faced criticism for its lending practices, as investors who borrowed money from the company were nearly 14 times more likely to be unable to repay the loans compared to other brokerages like eTrade and TD Ameritrade. This has raised concerns about the financial risk for customers, especially those who are younger and less experienced in the stock market.

In 2020, Robinhood wrote off $42 million in stock loans that customers failed to repay, and the company identified a further $41 million in loans at risk of default. While Robinhood promotes "buying on margin" as a way for customers to trade like professionals, experts warn that it can quickly lead to unexpected losses that exceed the original investment.

The difference between buying stocks with a loan from a bank and a brokerage firm is that the brokerage firm can liquidate your portfolio if its value falls below the margin limit. This means that if the equity in a customer's account falls below the minimum maintenance requirements, Robinhood may be forced to sell some or all of their securities without prior approval. This can result in amplified losses for the investor.

Robinhood charges $5 a month to borrow up to $1,000

Robinhood Gold costs $5 per month and offers a variety of benefits, including the ability to borrow up to $1,000 interest-free. This service is particularly appealing to those seeking quick access to funds for large purchases. While the $5 monthly fee is a flat rate, it is important to note that borrowing above $1,000 incurs an additional annual interest charge of up to 5.75%. This interest is calculated daily and billed at the end of each cycle.

Robinhood Gold subscribers gain unlimited access to in-depth stock research and analysis from Morningstar, a leading investment research provider. This includes reports analyzing various factors such as company business strategies, leadership, and fair market value. Additionally, Gold members can earn up to 5% APY on uninvested cash and enjoy a 3% match on IRA contributions. The Gold membership also includes the Robinhood Gold Card, a credit card with no annual fees and perks like 3% cashback on all purchases and 5% cashback on travel bookings.

It is worth noting that margin investing, or borrowing money to purchase stock, comes with risks. Robinhood itself has faced backlash due to its lending practices, with some experts arguing that its customers are more likely to default on loans compared to other brokerages. This is partly attributed to the younger demographic of Robinhood users, who may have less experience in the market. Therefore, while Robinhood's $5 monthly fee for borrowing up to $1,000 is a straightforward offer, it is crucial to understand the potential risks associated with margin investing.

Robinhood's margin withdrawal requirements

Robinhood offers loans to buy stocks, allowing customers to "buy on margin". This means that customers can take out a loan to buy stock, options, or other securities to boost their investment returns. For $5 a month, users can borrow up to $1,000 for investment purposes. For anything above $1,000, investors have to pay an annual interest rate on the loans.

Margin withdrawals can be used for day-to-day spending and withdrawals. With margin, you can borrow money by using your portfolio as collateral. While investors usually borrow money for more investments, the funds can also be withdrawn as cash.

Margin borrowing increases your level of market risk and can magnify both your gains and losses. Before using margin, customers must determine whether this strategy is right for them given their investment objectives and risk tolerance. If you get a margin call, you need to bring your portfolio value back up to your minimum margin maintenance requirement, or you risk Robinhood liquidating your positions.

If your Robinhood account has a restriction, you may be unable to withdraw funds. On trading days, there are three potential cutoff times for when you can cancel a transfer depending on when you initiated it. After the cutoff times pass, you can't cancel a transfer and must wait for it to be available. There's no fee for standard bank transfers, but instant withdrawals to a debit card or bank account can incur a 1.75% fee (with a minimum of $1 and a maximum of $150 per transaction).

To withdraw money from Robinhood, you can transfer money from your Robinhood account to your external debit card or bank account. To do this, select a linked external account to withdraw to, and if your account qualifies, instant transfers will be shown next to the external account. Then, review the withdrawal and confirm any associated fees.

For 60 days following a deposit, you may be required to verify additional information if you want to withdraw money to a different source account than the one you originally deposited them from. If the original bank account is closed or you're unable to access it, you can contact Robinhood for help initiating a withdrawal to another bank account.

Robinhood's revenue from loans

Robinhood is an online discount brokerage that offers a commission-free investing and trading platform. The company makes money from a variety of sources, including revenue from loans.

One of Robinhood's primary sources of revenue is interest on margin loans to users. For a $5 monthly fee, users can borrow up to $1000 for investment purposes. Loans above $1000 are subject to an annual interest rate, which was 5% until December 2020, when it was halved to 2.5%. In 2023, Robinhood's net interest revenues rose by 119% to $929 million, comprising nearly half of its total revenue.

Robinhood also offers a premium subscription service called Robinhood Gold, which provides access to additional features and services for a fee. In addition, the company generates revenue by lending out users' stocks to financial institutions and market participants, who may use them for short sales or to satisfy delivery requirements. Robinhood passes on a portion of the gross revenue generated from these loans to its users, with stocks on loan receiving a minimum payment of $0.01 per month.

Robinhood's lending practices have faced scrutiny due to concerns about the financial risk posed to its users, particularly those with smaller investment accounts. In 2020, the company wrote off $42 million in stock loans that customers failed to repay, and an additional $41 million was identified as being at risk of default. Despite this, Robinhood expanded its lending business in the run-up to its initial public offering in 2022.

Frequently asked questions