Many people who need cash immediately think about selling investments or taking out a traditional loan. But there may be another option: borrowing against assets you already own.

Using assets as collateral can provide access to cash while allowing you to retain ownership of investments or property. That can be particularly useful when selling an asset could interrupt a long-term investment strategy or create tax consequences.

One of the most familiar examples is borrowing against the equity in your home. A home equity loan provides a lump sum, while a home equity line of credit, or HELOC, generally allows you to borrow as needed up to an approved limit.

Investment portfolios may provide another source of borrowing power. A securities-based line of credit allows eligible investments to serve as collateral while they remain invested. However, these arrangements carry risk because the value of the investments can fluctuate.

Why borrow instead of sell?

Borrowing against assets may offer several potential advantages:

  • Keep investments working. Instead of selling investments to raise cash, you may be able to leave them invested and retain the potential for future growth.
  • Avoid an immediate taxable sale. Selling appreciated investments may result in capital gains taxes. Borrowing against them generally does not constitute a sale.
  • Gain access to cash. Asset-backed borrowing can provide funds for major purchases, unexpected expenses or other financial needs.
  • Potentially receive favorable borrowing terms. Because the loan is secured by an asset, rates may be more attractive than some unsecured borrowing options.

Understand the risks

Borrowing against an asset is still debt, and the strategy is not appropriate for everyone.

With a HELOC or home equity loan, your home serves as collateral. Failure to repay the debt could put the property at risk.

Borrowing against investments presents a different concern. If the value of pledged securities falls significantly, a lender could require additional collateral or repayment. In some situations, investments may have to be sold to satisfy the lender’s requirements.

Interest rates also matter. Variable rates can increase, raising the cost of borrowing over time.

Before using an asset to secure a loan, consider:

  • How much cash do you actually need?
  • What will the borrowing cost?
  • How and when will you repay it?
  • What happens if interest rates rise or asset values fall?
  • Would selling an asset ultimately cost less?

Borrowing against assets can provide financial flexibility, but the benefits should be weighed carefully against the costs and risks. A financial professional can help determine whether the strategy fits your broader financial goals.

First Horizon Bank is a leading regional financial services company, dedicated to helping our clients, communities and associates unlock their full potential with capital and counsel. It’s the powerful tools you need with the personal service you deserve. Contact First Horizon for all your banking needs.

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