How to Raise Cash in a Hurry Without Selling Investments

You might be able to raise cash quickly and easily without going to a bank, completing a lot of forms and paying fees. The interest rate might be lower, too. Sometimes an unexpected expense or opportunity arises, and you must choose how to raise the cash. You could dip into cash reserves. But the expense might bring the reserves lower than you want. You don’t always want to sell investments to raise the cash. There could be selling expenses.

Plus, there is the opportunity cost of being out of the markets. Of course, whether you sell investments from a tax- able account or take a distribution from a traditional IRA, there could be taxes. An often-overlooked way to raise the cash is to take a loan against your investments. There is no credit check. Nor are there any financial disclosures to complete.

Often, the entire borrowing process is very quick. Most brokers and even some mutual fund companies offer margin loans against investor accounts. The broker will make a loan up to a stated percent- age of one’s portfolio’s value, usually 50%. If you have $500,000 of investments with a broker, you can borrow up to $250,000.

When your account has been established for a while, applying for the loan, and having the loan proceeds de- posited in your checking account usually take between hours and days. When the account is new, there might be a waiting period of 30 days or longer. You can use the loan proceeds for any- thing you want, and there are no taxes from selling investments.

Most margin loans don’t have specific repayment terms. Instead, the loan prin- cipal plus interest can’t exceed 50% of the value of your investments in the account. That brings us to the tricky part, espe- cially when markets are declining. When the value of your investments declines, the allowable outstanding loan balance also declines. That’s not a problem when you borrow much less than the 50% maximum.

When you borrow 30% of the account, and the value of the investments declines 10%, your outstanding balance still is below the 50% threshold. But when you borrow at or close to the 50% threshold or your investments de- cline a lot, the loan balance might exceed the allowable amount. In that case, the broker will give you a short time to add cash to the account. Otherwise, it will sell automatically enough of your invest- ments to bring the loan into compliance.

You might owe taxes on those sales, though they weren’t your choice. In a margin loan, borrow much less than the maximum and borrow against less volatile investments.

You can’t borrow against an IRA. That would be treated as a taxable distribution. Interest rates on margin loans vary considerably from broker to broker. TD Ameritrade charges a base interest rate plus a percentage that varies with the loan balance. For a loan balance up to $10,000, the additional interest rate is 1.25%. For balances from $10,000 to $24,999.99, the additional rate is 1.00%. The base rate recently was 12%. Compare that with the rates at Inter- active Brokers, which has a reputation for the lowest or among the lowest margin loan rates. The base or bench- mark rate at Interactive recently was 3.830% on its IBKR accounts.

For loans up to $100,000, Interactive charged the benchmark rate plus 1.5%, or a total rate of 5.33%. When you already have a home equity line of credit in place, you might find that’s better than a margin loan. But you might find a better interest rate or terms through a margin loan. Or you could use the margin loan to generate quick cash to pay an expense and then look for a home equity line of credit, asset sales, or other longer-term solution.