Margin loans are an interesting beast. These types of loans are not mentioned a lot in everyday conversation. Usually, individuals in the corporate and investing worlds work with these types of loans. Even then, a lot of the individuals who are in those worlds still don’t quite understand what these loans are. So, I’m writing this article to discuss what are margin loans? Stay with me and we will discuss how they work, is it is a good idea to borrow on margin loans, and when you should use margin loans.
How do Margin Loans Work?
Understanding how this works is very simple. Implementing it and taking advantage of it is the difficult part. As with all things, the only way to understand it is by repetition and failing a few times unfortunately. So, how do margin loans work? Well, they are a type of secured loan where your brokerage firm uses your investment as collateral. If you ever stop making payments, or are unable to, your broker can take your investments. See, it’s just that simple. However, knowing when to use it is the key. Which, we will talk about next.
Is Borrowing on Margin Loans a Good Idea?
I’l start this out with an easy way to figure it out. This loan is only a good idea when you know exactly what you are going to do with the loan. Business people are good at understanding when an idea is going to work or not. Well, I should say they usually are. One thing to note is that margin loans are more maliable when it comes to the terms of it. Meaning you can change and adjust how much interest you pay and when. In the beginning, at the end or throughout the loan. Banks are a bit more lenient the bigger the asset is.
I’ve done this a few times in my career and it has worked out thus far. Most of the time when I’ve done this was because the opportunity was something that I was looking at for a long time and the time came for me to strike. I utilize my assets as collateral and took that money to get an asset that was going to pay itself off sooner rather than later. There for I was able to pay off the loan before expiration date and I was in the clear.
When should you use Margin Loans?
As discussed before only use these type of loans when you know what your are getting into to. A current situation in which this type of financing is taking place is Elon’s takeover of Twitter. He is utilizing a mix of financing, including margin loans, to acquire Twitter. Which means, he is putting up is shares in Tesla as collateral for a loan from the bank. Elon is doing this because he has a well put together plan to get his money back and pay off the loan. Now, understanding when you have a good plan that will work or not is the risk. But, as the old saying goes, scared money don’t make money.
Margin loans are a very hard concept to understand. Hopefully, this article cleared up some of the confusion. But as I say at the end of all of my articles this is just an intro to the subjects. Continue to read and learn about these types of loans. Because the more you know the more tools you have to succeed in business. One of the best books on this topic is Money for Nothing by Thomas Levenson.
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