Monday, October 01, 2018

Not All of Them

A few years ago I had a short-term need for $90,000 (don't we all?). There were drawbacks to raising the money through stock sales or IRA withdrawals; the $90,000 would be replenished in three months, and these methods would result in income taxes--about $20,000--that did not have to be incurred. So I decided to borrow using margin from Charles Schwab.

Under a margin loan account holders can borrow up to 50% of the value of their stocks. It's risky to borrow the full 50%, because the borrower would be subject to a maintenance call if stocks go down, as they sometimes do 😀. (The broker would sell enough stock to pay down the margin loan so that the ratio was back to 50%). In my case $90,000 was safely under 50% of the stock value, so a margin/maintenance call was not a worry.

These changes to 0.075%-1.825% don't look so bad
The borrowing rate that Schwab charged was about 7%, so when I got back the $90,000 in 2½ months I paid off the margin loan immediately. (Aside: margin loans are a form of secured borrowing--as are home mortgages--where the lender has the right to sell assets to recover its loan. IMHO, a secured loan backed by publicly traded stocks should bear a low interest rate because of the low risk to the lender, but that's just me.)

until you notice the Base Rate is 7.75%
Anyway, I've taken steps to ensure that I won't be using margin debt any time in the future.

A couple of months ago we noted how the interest that Schwab pays on its cash deposits was well under 1%. So you lend them cash at 0.2%; they lend it back to you for more than 7.75%.

I like the services and products we get from Schwab, but not all of them.

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