QUESTION: I have an investment portfolio with my broker and they’re offering me a line of credit based off the account value- should I use this for upgrades in my gym?
ANSWER: Typically, a portfolio loan is only used for short-term investments (a bridge for a couple months where you wait for a sale of a house or liquidation of an investment…), not a long-term investment. It’s essentially a margin loan, where they will give you 30% of your current portfolio as a loan (which is nice to access when the portfolio is a retirement account, without having the tax consequences), however if the portfolio value falls (markets take a turn for the worse), the bank will make you maintain that 30% ratio and you’ll receive a ‘margin call’ (the bank will make you come up with cash to make up for the losses in the investment portfolio- cash is already tight so coming up with a margin call will be difficult). It’s the type of product individuals got hurt with during the last recession in 2008, when the markets crashed and banks came calling… Better to go with a traditional loan where your rates and payments are known and fixed.