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A nonpurpose loan is an extension of credit in which borrowers can pledge securities as collateral and use the funds for personal reasons. Borrowers, for example, can use a nonpurpose loan to finance real estate transactions and education expenses.
Borrowers cannot use nonpurpose loans to buy, trade, or carry margin stock. A margin stock, as defined by federal regulators, can include equity securities, debt securities, and securities issued by an investment company.
Getting a collateralized bank loan in excess of $100,000 secured directly or indirectly by margin stock requires you to complete a form stating the purpose of the loan. Below we highlight the similarities and differences between a purpose loan vs. nonpurpose loan.
The way nonpurpose loans work is a lender provides borrowers with an extension of credit secured by securities as collateral. Stockholders, for example, can pledge eligible equity securities as collateral on a nonpurpose loan.
Regulation U implemented by the Board of Governors of the Federal Reserve System may require borrowers to report the specific purpose of their nonpurpose loan. A nonpurpose loan from bank or nonbank lenders can be used for almost any purpose except for buying or carrying margin stock.
Investors, for example, can take out nonpurpose loans to help finance real estate transactions or cover unforeseen expenses.
A securities-backed line of credit, also known as an SBLOC, is an example of a nonpurpose loan. Investors can use eligible securities in their investment portfolios as collateral on an SBLOC. The investor is permitted to use the SBLOC for a large variety of purposes except for buying or carrying margin stock.
Brokerage firms may offer SBLOCs to investors. These nonpurpose loans can have risky terms and conditions for borrowers.
Lenders of securities-based loans, for example, may require borrowers to meet and maintain sufficient collateral requirements. Borrowers may be required to deposit additional funds or eligible securities if the value of their pledged collateral plunges.
A purpose loan is an extension of credit for the purpose of buying or carrying margin stock. A nonpurpose loan, meanwhile, is an extension of credit for any purpose other than buying or carrying margin stock.
A nonpurpose loan is collateralized by margin stock, while purpose loans can be unsecured without collateral.
A purpose loan is not necessarily better than a nonpurpose loan, and nonpurpose loans are not necessarily better than purpose loans. Both options can present risks to the borrower.
Investors who cannot tolerate the risk of pledging securities as collateral may prefer an unsecured purpose loan over nonpurpose loans. Other investors who want access to quick capital without liquidating their security holdings may view nonpurpose loans more favorably.
Borrowers may also consider other options for financing, including a personal loan . Banks, credit unions, and private lenders may offer personal loans ranging from $1,000 to $100,000.
There are multiple benefits of obtaining a personal loan , such as the following:
Among the advantages and disadvantages of a personal loan are that they can help you build credit but may feature high rates of interest.
Personal loans can provide borrowers with a lump sum of money that must be repaid over a set period. Failing to pay and defaulting on a personal loan can have a major impact on your credit score.
Borrowing money to buy securities is something any consumer may consider. Consumers may have the option of using a personal loan to invest in stocks and other securities.
The below table highlights some of the pros and cons of nonpurpose loans:
Borrowers have large discretion on how to use the funds
Borrowers may be required to deposit additional funds or eligible securities on short notice
Interest rates can be relatively low
Can be difficult to meet collateral maintenance requirements during market downturns
Pledging your investment portfolio as collateral can lead to quick funding
Funds cannot be used to purchase or carry margin stock
Below we highlight some of the pros of nonpurpose loans:
Nonpurpose loans give borrowers the flexibility to spend the funds on almost anything other than buying or carrying margin stock. Borrowers can get approved relatively quickly and may use the nonpurpose credit to finance a dream vacation or home repairs, among other things.
Borrowers can get relatively low interest rates on a nonpurpose loan. These loans may feature no closing costs and may provide the borrower with hundreds of thousands of dollars in financing, if not millions.
Investors with a well-diversified investment portfolio may pledge eligible securities as collateral for large sums of financing. This can give investors quick access to capital without liquidating their security holdings.
Below we highlight some of the cons of nonpurpose loans:
Volatility in the equity markets can impact borrowers of nonpurpose loans. The value of stocks and other securities in your investment portfolio can fluctuate. Lenders of nonpurpose loans may require you to deposit additional funds or eligible securities if the value of your pledged collateral plunges.
As mentioned above, lenders of nonpurpose loans may require you to deposit additional funds or eligible securities if the value of your pledged collateral plunges. This is one of the risks associated with nonpurpose loans.
Nonpurpose loans restrict the borrower from using the funds to buy, carry, or trade additional securities. You may have to consider other options if you need to borrow money to buy stocks or bonds.
Here are some alternatives to nonpurpose loans:
Credit cards are an alternative to nonpurpose loans. Every credit card account has a predetermined credit limit capping how much you can charge on the card.
Cardholders are expected to repay their credit card debts over time and can make monthly payments that meet or exceed the minimum payment due. You can generally avoid paying interest on credit card purchases by paying your statement balance in full each billing cycle.
Personal loans are an alternative to nonpurpose loans. There are at least 12 types of personal loans that consumers may consider, depending on their needs.
Lenders may offer personal loans ranging from $1,000 to $100,000. Your credit score and debt-to-income ratio may impact how much of a personal loan you can get from a lender.
Nonpurpose loans can present a number of risks to the borrower. These collateralized loans may provide you with quick financing, but lenders can sell your pledged securities if you fail to meet collateral maintenance requirements. Investors may consider other borrowing options.
Lantern by SoFi can help you check the current personal loan rates . Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice. Check your rate today and see if you prequalify.
