Using your securities to borrow money

Key takeaways

  • You can use securities you own as collateral to borrow money on margin.
  • Money borrowed on margin can be used for whatever purpose you like—from purchasing additional securities to funding a home improvement project and paying for a car.
  • Be sure to understand the risks associated with borrowing in general, and with margin in particular, along with how it may impact your investment strategy, when deciding if it's appropriate for you.

One of the ways you can use margin is to buy stocks and other securities like ETFs or mutual funds on credit. But did you know you can also use margin as a flexible line of credit for other non-investment purposes—like buying a car or remodeling your kitchen?

Simply put, borrowing on margin means taking an interest bearing loan secured by securities you own in your brokerage account (the securities are pledged as collateral for the loan). Using margin as a secured line of credit could be used as a supplement to, or instead of, getting a loan or financing from traditional sources—such as bank loans and credit cards.

Of course, borrowing has risks—including the risk of losing the collateral that you might pledge for a loan, and possibly other assets as well. In many cases, a borrower might be better advised to simply pay with available funds, or if that isn't possible, to not buy it—whatever it is—at all.

With that said, and depending on your circumstances, in some cases using margin as a line of credit can be cheaper than using other loan sources—such as credit cards. However, it's essential that you fully understand what borrowing on margin entails, its risks, and how it differs from traditional loan sources to determine if it's appropriate for your specific situation.

This is only a brief introduction to the topic, and it should not be considered sufficient basis for a decision regarding the use of margin borrowing. Those interested in the possibility of borrowing on margin should also read the more detailed guides available from regulators including the Securities and Exchange Commission Financial Industry Regulatory Authority (SEC) and FINRA.

Potential benefits of a margin loan

Some of the reasons you might consider using margin as a loan source include:

  • Speed and convenience. Once you enable margin on your account, you can access a margin loan immediately, or at any time later on, without new forms or application fees.
  • Relatively low interest rates. Margin rates, which use a base lending rate and a premium or discount based on the amount borrowed, can be broadly similar to rates on home equity loans for many investors, depending on loan size. And both are usually lower than the interest rates on unsecured loans, such as credit cards. Margin rates are typically on a tiered schedule, so that the higher the borrowing amount, the lower the rate. The amount you can borrow is variable, depending on the securities you pledge as collateral, and also subject to regulatory limits.
  • Repayment flexibility. So long as you maintain the required level of equity in your account (see "Maintaining account equity" below), you can pay back margin loans on your schedule. There is no monthly principal payment required (although interest will be due periodically) and no term in which you need to repay the loan, although you're allowed to repay part or all of your loan at any time.
  • Potential tax advantages. Margin loan interest may be tax deductible depending on your situation.1 Consult your tax advisor to learn more.

Know the risks

The most common scenario where it might be necessary to deposit additional funds to meet margin requirements is one where your securities decline in value, but it's not the only scenario. When using margin loans, you should always be aware of the following:

  • The potential for a margin call. If your equity falls below the margin maintenance requirement, which can be due to price fluctuations in your securities, margin requirement changes, or securities transactions that affect your equity, you'll receive a margin call requiring you to deposit additional funds—although you may also satisfy a margin call by depositing additional securities or by selling existing securities and using the proceeds to pay off the margin loan. If you fail to meet a margin call, your broker will sell assets from your portfolio to pay down the loan, and in some cases, may even sell securities to pay down a margin loan without contacting you first.2
  • The investment implications of possibly having to sell. In the event that you decide, or are forced, to sell investments due to a margin call, you should fully understand how that can change your asset allocation and mix of investments. If you sell securities that helped you diversify or generate income, for instance, you should understand and be willing to accept the risks of how that may impact your strategy and long-term goals. You may also realize capital gains and therefore be subject to capital gains tax.
  • Purchases may impact margin loans. Securities that you purchase may not be immediately marginable and can thus impact your equity. For example, purchases of mutual funds are not margin eligible for the first 30 days of ownership. Also, note that some purchases may be subject to different, and potentially higher maintenance margin levels.

How much can I borrow on margin?

While margin can provide flexibility by not locking you into a fixed monthly principal repayment plan, it's important to understand the amount available to borrow is dependent on the type and value of your eligible securities, which may fluctuate over time. And of course, even without scheduled principal repayments there will still be interest assessed on the loan, so you'll need to be sure that you have sufficient funds available to cover this interest expense. Find out more about eligibility

Maintaining account equity

Margin loans are quite complex, so bear in mind that what follows is only a guide.

Once you've borrowed on margin, you'll need to keep an eye on what is called your account's level of equity. The equity of a margin account is equal (in simple cases) to the account's total value minus the outstanding margin loan, and this equity must be kept at or above a margin maintenance level. Typically, the margin maintenance level is 30% of the total account balance, but it may be higher, depending on the type of securities held in the account and other factors.

In any case, this means that using margin loans creates a risk that you will be required to deposit additional funds to your account, or else be subject to an involuntary liquidation of the securities held in your account in order to pay off the margin loan. The requirement to deposit additional funds, when your equity falls below the minimum requirement, is known as a margin call. You can read more on these requirements.

Understanding different ways of borrowing

It's essential that you fully understand what borrowing on margin entails, its risks, and how it differs from traditional loan sources to determine if it's appropriate for your specific situation. We've mapped out a general comparison of a few common ways to borrow money, which may help you decide if a margin loan is right for you.

  Margin loan Traditional home mortgage Home equity line of credit Credit card
Overview A line of credit secured by securities you already own Loan with a fixed term and either a variable or fixed interest rate, secured by residential property Stand-by loan secured by residential property with a predetermined maximum and a variable interest rate Line of credit with a predetermined maximum which can be drawn upon at any time
Fees No closing costs, annual fees, setup fees, or non-use fees May have closing costs May have an annual fee and/or closing costs May have an annual fee and/or other transaction fees
  • Margin calls and/or liquidation of securities
  • Amplified losses if the securities in your account decline in value
  • Losses greater than the original investment are possible
  • Interest rates may rise, increasing the cost of your loan
  • Interest rates may rise, increasing the cost of refinancing your loan
  • Foreclosure and/or eviction based on failure to pay
  • Interest rates may rise, increasing the cost of your loan
  • Foreclosure and/or eviction based on failure to pay
  • Late payments and/or rising interest rates may increase the cost of your loan
  • Failure to pay may result in closure of account, restricted access to credit, and asset seizures
Rates4 Variable with interest rates, and dependent on amount borrowed, plus other factors Fixed or variable dependent on income, collateral, credit qualifications, and type of loan selected Fixed or variable with interest rates, and dependent on income, collateral, credit qualifications, and type of loan selected Variable with interest rates, and dependent on income and credit qualifications
Secured by Securities in margin account The collateralized asset (e.g., house, condo) The collateralized asset (e.g., house, condo) Unsecured
Tax treatment of interest payments5   May be tax deductible May be tax deductible May be tax deductible Not tax deductible
Accessibility Access funds at any time without having to sell securities Must apply each time you need to borrow additional funds Credit does not expire but can be reduced or closed by the lender Credit does not expire but can be reduced or closed by the lender
Payback terms Deposit cash or sell securities to pay down your loan Set monthly payment (scheduled) for term of loan Minimum monthly payment required Minimum monthly payment required
Amount of credit available Varies based on the value and type of securities in your portfolio; subject to regulatory and broker imposed limits Varies based on the value of the collateral; may also be subject to regulatory limits Lender defines minimum/maximum amount Lender defines available balance

Source: Fidelity Investments. Note that the specifics of a margin loan are based on margin requirements for the investments you own.

Possible uses of a margin loan

Margin can be used for a variety of purposes, including a home renovation or a car purchase.

For example, suppose you've been investing for a number of years and have built a diversified portfolio of investments in a marginable brokerage account worth $500,000 comprised of marginable securities like stocks, ETFs, and mutual funds. Now, you're thinking about remodeling your kitchen, and you need $50,000 for the project. When thinking about how to pay for it, you might opt to simply liquidate $50,000 from your account. That's a very simple, straightforward option, and it may be the best option for many people, but it might also mean you'd be subject to taxes on capital gains, and it would definitely reduce your exposure to potential market gains.

So, depending on your circumstances, you might also think about borrowing the $50,000. In that case, you might consider using a credit card, getting a bank loan, or leveraging some of the securities in your portfolio as a line of credit via margin. The right answer depends on a careful consideration of a variety of factors, including your financial needs, tax considerations, your liquidity situation, and risk tolerance.

Before considering margin as an option, it is important to fully understand margin requirements. Once again, the following is highly simplified, so it should be regarded only as a rough, high-level guide to the process.

Assume that the margin maintenance requirement in this case is 30%, and that the initial margin limit is 50% of the total value of marginable securities in the portfolio, or $250,000 (assuming all securities in the account are marginable). Given that the remodeling budget is well within the maximum amount you are able to borrow on margin, this may be a viable option.

If you decide to borrow $50,000, your account market value would initially remain at $500,000 and your equity would be $450,000. It's critical to keep your equity higher than the margin requirements. So in this case, your equity would be 90% (that is, $450,000 / $500,000), and you would only get a margin call if your account value fell from $500,000 to below $71,429. Let's follow this formula to help understand where that value came from.

Market value of securities at margin call = amount borrowed / (1 − the margin requirement) X = $50,000 / (1 − .3) X = $71,429

Ways to help manage a margin line of credit

To ensure that you're using margin prudently, it may be possible to manage your margin as a line of credit by employing the following strategies:

  • Have a plan. You should never borrow more than you can comfortably repay. Think about a process for taking out the loan and ensuring that it aligns with your financial situation, and consider how you'll respond in the event of various market conditions. Among other things, you should know how much your account can decline before being issued a margin call. Find out more on managing margin calls
  • Set aside funds. Identify a source of funds to contribute to your margin account in the event that your balance approaches the margin maintenance requirement. This can be anything from cash in another account to investments elsewhere in your portfolio (as noted above, you should understand the implications of selling investments).
  • Monitor your account frequently. Consider setting up alerts to notify you when the value of your investments declines by an amount where you need to start thinking about the possibility of a margin call.
  • Pay interest regularly. Interest charges are automatically posted to your account monthly. It's important to have a plan for reducing your margin balance to minimize the interest amount you're charged which you can do by selling a security or depositing cash into your account.

Is margin as a line of credit right for you?

You should have a thorough understanding of the mechanics of margin borrowing, including associated financial and tax considerations, before utilizing it as a line of credit. Be sure to carefully review your investment objectives, financial resources, and risk tolerance to determine if this strategy is right for you. Once you do familiarize yourself with margin, it may help you manage your finances more effectively.

Looking to add margin?

Complete an online agreement and agree to the terms and conditions of using margin.

More to explore

Margin FAQs

Get answers to frequently asked questions about margin.
1. Investment interest expense is the interest on money you borrow to purchase taxable investments. For example, you can deduct the interest on a margin loan you use to purchase stock, but not if you use the margin loan to buy a car or tax-exempt municipal bonds. There's a cap on deductibility equal to your net investment income, but any leftover interest expense can be carried over for future use, without expiration.

Going on margin is, essentially, getting a very short-term loan. What is often called "margin expenses" is the repayment of interest on the loan. As a result, the IRS treats margin expenses like any other investment interest paid. That means you can only deduct up to your net investment income.

You can deduct investment interest to the extent of your taxable investment income — from interest, short-term capital gains, certain royalties and the like. If you don't have enough investment income, the excess interest expense gets carried over to the following tax year. Interest on loans used to purchase nontaxable investments, like municipal bonds or muni-bond funds are nondeductible.

If you have investment interest, complete IRS Form 4952 (Investment Interest Expense Deduction) to calculate your write-off. You also use this form to indicate how much of your long-term capital gains and qualified dividends, if any, you want treated as investment income.
2. Fidelity can sell assets in your account at any time without contacting you. While Fidelity generally attempts to notify customers of margin calls, it is not required to do so. Even if you are notified, Fidelity can still sell assets before the time indicated in the notice, if it believes such action is warranted. You understand that if we contact you in advance in certain instances, we are not obligated to do so and such action will not be deemed a waiver of our rights under this agreement. Per FINRA, You are not entitled to choose which securities or other assets in your accounts are sold. Your firm can increase its margin requirements at any time and is not required to provide you with advance notice. 3. If your margin equity falls below a certain amount based on the amount you have borrowed, then the account is issued a margin call. You may be required to sell securities or deposit funds to meet the margin call, and in some cases securities may be sold without notification to you. 4. Rates vary depending on the type of loan and may be higher or lower than a margin loan rate. Be sure to check with the financial provider to confirm exact rate. 5. Tax situations vary by individual. Consult your tax advisor on the tax treatment of your loans.

Margin trading entails greater risk, including, but not limited to, risk of loss and incurrence of margin interest debt, and is not suitable for all investors. Please assess your financial circumstances and risk tolerance before trading on margin. If the market value of the securities in your margin account declines, you may be required to deposit more money or securities in order to maintain your line of credit. If you are unable to do so, Fidelity may be required to sell all or a portion of your pledged assets. Margin credit is extended by National Financial Services, Member NYSE, SIPC.

Past performance is no guarantee of future results.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917