Retirement & Financial Planning Report

One potential source of loan income for those who either can’t or don’t wish to borrow against the value of their home is margin loans on stock brokerage accounts. These have several advantages but also carry risks that might be too much for some people in or near retirement.

When you get a margin loan from your broker, you’re gaining access to a low-interest line of credit secured by investments. Setting up a margin account also can protect you from bank or brokerage firm overdraft charges.

Margin loans do not require an application or processing fees and the money is available right away. You can get margin loans easily, without having to reveal the details of your financial life to a bank lending officer. The interest rate you’ll pay on margin loans may be the same or even lower than the rate on traditional bank loans and there is no repayment schedule for margin loans.

Historically, margin loans may be worthwhile if used for solid investments such as real estate, proven stocks, or the exercise of stock options. Recently, many margin loans are being used for other purposes, such as college tuition and home improvements. Just don’t rely upon margin loans to finance a higher-priced lifestyle.

There are risks with margin accounts. If your securities lose value, you may have put up more cash to prevent the sale of some of your holdings. To reduce this risk, borrow less than the maximum amount available, which generally is 50 percent of the value of the securities in your brokerage account.

As a rule of thumb, you should control your risks by keeping margin down to no more than 15 percent of your portfolio. If the loan balance is pushed to the limit (50 percent of portfolio value), you risk a margin call, which means you must put up more cash or securities. When you get margin calls, consider them to be yellow flags, indicating you should proceed with more caution.

If you get margin calls, here’s how to slow down:

* Don"t borrow any more on margin.

* Negotiate with your brokerage firm for a lower interest rate or shop around for a lender with better terms.

* Pay off the loan, even if it takes you three years to do so.

* Once the loan is paid off, keep your margin loans down to a moderate level.