Most brokerage firms extend margin loans to clients.
Purpose� loans are used to purchase other securities. Typically, you can borrow up to 50 percent of the value of your collateral.
With $100,000 worth of stocks, bonds, and funds in your portfolio, for example, you might borrow $100,000 to buy other securities. You now hold $200,000 worth of securities, securing your $100,000 loan.
Non-purpose loans can be used for anything else, other than buying securities. With a $100,000 portfolio, you might get a non-purpose loan of $80,000 or even $90,000.
You’ll pay less for a margin loan than you would for credit card debt or a personal loan from a bank. For margin loans, your brokerage firm might charge one full point over the prime lending rate. If the prime rate is 4 percent, you’d pay 5 percent on margin loans.
Purpose loans produce investment interest, which is deductible up to the amount of your net investment income. Non-purpose loans generally produce non-deductible personal interest.
