Beyond basic borrowing

Morgan Stanley Wealth Management


Summary: 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.

Picking out a book from the library

Many people borrow in order to buy homes, pay taxes, and finance personal interests. They also borrow to finance businesses, college educations, or other needs.

But 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 on a well-thought-out investment strategy.

To avoid this, consider periodically reviewing your debt structure. This could potentially help you:

  • Reduce interest costs
  • Enable faster debt repayment
  • Offer an additional source of liquidity for unexpected cash needs
  • Better manage cash flows

Leveraging the power of your investments

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. This option uses your investments as collateral for a securities-based loan and may provide you with funds that can be used to consolidate many different loans into a single line of credit. Here’s how.

  • Flexible repayment options: 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 if you maintain sufficient collateral, you can allow interest to be added to the principal. 
  • Line of credit: Also, because a securities-based loan is a line of credit, available funds can be used whenever future purchases or unforeseen events occur—planning a wedding, buying a new home or car, or even renovating your kitchen are just a few examples—without requiring a new application.
  • Lower rate: Securities-based lending may also offer you a potentially lower interest 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.
  • Additional Benefits: Borrowing against securities may provide additional benefits, including the potential to maintain your long-term investment plan, like saving for retirement, 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.

The source of this article, "Beyond Basic Borrowing,” was originally published on July 8, 2023.

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