Though most Americans have at least a passing understanding of the ability to use the equity in a house to obtain a low-interest loan though a home equity line of credit (HELOC), there is a lesser-known option for obtaining quick line of credit financing that might offer more compelling benefits for some.

The financing option is available to individuals or businesses that maintain a non-retirement investment account and may provide lower rates than comparable HELOCs with the potential for faster processing times.

The key to getting a good interest rate on a loan comes down to the certainty that the lender will get repaid.

Houses as collateral

To provide certainty, the lender often requires collateral to secure payment. On a HELOC, the collateral is the house and the equity the borrower has in the house.

But houses as collateral have some drawbacks for lenders. Customarily, an appraisal is required to validate the value of the house for the lender. This can cost hundreds of dollars and takes weeks to perform.

Additionally, in order to evidence the existence of the collateral obligation, the lender often has to record documentation with the local county auditor’s office which likewise takes some time and costs money. Lastly, if the lender needs to seize the asset for lack of payment, the process can be time consuming and costly.

Investment accounts

Some Americans have another asset that is ripe for use as collateral for a line of credit: a non-retirement investment account. Because of the nature of the asset, it can be a much swifter application process.

Unlike a HELOC, no appraisal is necessary because the assets in an investment account are valued daily by the world markets.

Unlike a HELOC, the lender need not record the security interest with any local county auditor’s office.

For good or bad, if the lender needs to seize the asset for lack of payment, the process is likewise swifter and less costly for the lender. These advantages translate in many cases to cost savings for the consumer and the potential for a faster processing time.

Like HELOCs, different companies offer a line of credit secured by the value of a non-retirement investment account.

Typically, the interest rates are variable and may change from month to month.

Repayment options also are flexible. The borrower can choose to pay interest-only on loans or can pay down principal as desired.

When a person takes the loan, the lender is granted access to the investment account so that it can be used as collateral to secure payment on the loan. While the collateral (investment account) is secured similar to how a HELOC is secured by a home, the process doesn’t require filings with the county auditor’s office.

Typically, a lender offers to loan in the range of about 65% of the value of the investment account.

For those individuals that maintain investment accounts and have the account set up for a line of credit, the access to financing is quick and easy. Typically, online access allows the borrower to request funds and have those funds deposited in a linked bank account within a day or two.

For some, it also might provide a comfortable source of liquidity in a pinch. Accordingly, it also could allow an individual to feel secure keeping a lower amount of liquidity in savings accounts.

Potential downsides

A downside of a line of credit based on an investment account is the inherent volatility of the asset.

That is, though the investment account is easier to value because of the instantaneous pricing, it is also more volatile. The stock market and assets associated with the stock market tend to be more volatile than assets such as homes that are used to secure HELOCs.

And, because most lenders are willing to lend according to the value of the account (at perhaps 65% of account as mentioned above), there exists the real possibility that in the event of a market downturn that the lender would require the borrower to add money to the investment account to preserve the value of the collateral.

This cautionary note is particularly important to borrowers that borrow the maximum possible against the investment account.

Of course, a borrower should always be cautious about borrowing money and offering collateral to a lender. However, a line of credit based on the equity in an investment account can be a compelling alternative to a HELOC for those seeking additional access to liquidity.

Beau Ruff, a licensed attorney, is the director of planning at Cornerstone Wealth Strategies,
a full-service independent investment management and financial planning firm in Kennewick.