Most people borrow during the course of their lives. But it’s important to be as strategic about borrowing as you are with the other areas of your financial life.
Let’s be honest: many people borrow as part of their financial plan. They borrow to buy homes, pay taxes and finance personal interests. They also borrow to finance businesses, college educations or other needs.
For these acquisitions, borrowing in one lump sum isn’t always feasible. As a result, over time people often end up with a cumbersome mix of mortgages, home equity loans, student loans, credit cards, and personal loans.
This piecemeal approach to borrowing can result in suboptimal loan structures and pricing, which may create challenges with matching cash flows to debt payments. Furthermore, taking an uncoordinated approach to borrowing can impede your ability to stay the course of a well-thought-out investment strategy.
Consider periodically reviewing your debt structure. By doing that you may:
- Reduce interest costs
- Enable faster debt repayment
- Offer an additional source of liquidity for unexpected cash needs
- Better manage cash flows
An uncoordinated approach to borrowing can take you off course from your investment strategy.
When it comes to taking a more strategic approach to debt management, one of the most powerful resources at your disposal is your investment portfolio. Using your investments as collateral for a securities based loan may provide you with convenient and competitively priced access to funds that can be used to consolidate many different loans into a single line of credit.
Unlike other forms of debt that have fixed repayment schedules and charge late payment fees, securities based loans are designed to give you flexible repayment options. You can pay principal or interest, or as long as you maintain sufficient collateral, you can allow interest to be added to the principal. Also, because a securities based loan is a line of credit, available funds can be used whenever future purchases or unforeseen events occur, without requiring a new application.
Securities based lending may also offer you a potentially lower rate than other forms of debt, including unsecured loans and credit cards. A lower interest rate may enable you to pay down debt more quickly and better manage cash flows so you can use available funds for other purposes.
Borrowing against securities may provide additional benefits, including the potential to maintain your long-term investment plan, as well as helping to avoid the tax consequences associated with selling appreciated investments.
Borrowing against securities may not be appropriate for everyone. You should be aware that there are risks associated with a securities based loan, including possible maintenance calls on short notice, and that market conditions can magnify any potential for loss.
Since debt is an important part of your financial picture, managing it requires a strategic approach. For more ideas on how to do so, Morgan Stanley clients should contact their Financial Advisor.