A non-purpose loan is an alternative type of loan that allows individuals to use investment securities they own as collateral to borrow money. With a non-purpose loan, borrowers can get access to the funds they need and continue to earn potential returns on their investments. However, non-purpose loans come with some financial risks to be aware of.
Read on to learn how non-purpose loans work and their benefits and drawbacks.
Key Points
• Non-purpose loans are unconventional loans that use investment securities as collateral.
• Borrowers get access to loan funds and can still continue to earn returns on their investments.
• These loans can be used for almost any purpose except purchasing securities.
• A borrower may need investment assets with a market value of at least $100,000 to qualify for a non-purpose loan.
• If the value of the collateral investments drops, you may have to add more funds to your account or partially repay the loan.
What Is a Non-Purpose Loan?
A non-purpose loan — also known as a securities-backed line of credit (SBLOC) — is a type of secured loan offered by some financial institutions and brokerage firms. Instead of using collateral such as a home or car to back the loan, a borrower uses securities in their investment portfolio.
Interest rates on non-purpose loans tend to be variable, and they may be slightly higher than the rates on personal loans. (A personal loan calculator can help you determine the personal loan rate you might qualify for.) The borrower must make interest-only monthly payments on a non-purpose loan until you decide to pay it off. The loan’s principal can be repaid in increments or all at once.
The Way a Non-Purpose Loan Works
With a non-purpose loan, you borrow money using your investments to back the loan, and you continue to earn any interest, dividends, and capital appreciation on those investments.
The amount you can borrow with a non-purpose loan varies, although you can typically borrow between 50% to 95% of your portfolio. The exact percentage depends on two main factors: the types of assets in your accounts and the value of your portfolio. Lender requirements may also be a determining factor. To qualify for a non-purpose loan, a lender may require you to have assets with a market value of at least $100,000.
Unlike traditional lending products such as personal loans, non-purpose loans are subject to maintenance calls. That means if the value of your investment accounts falls below a certain level, the brokerage or financial institution will ask you to boost the equity in your investments to meet the margin requirements.
In the case of a maintenance call, you’ll need to increase your accounts’ value by either depositing more money in them or partially repaying the loan.
Non-Purpose Loan vs Margin Loan
A margin loan is another type of lending product that’s backed by a borrower’s investment securities. Like a non-purpose loan, a margin loan allows you to borrow against the investments in your portfolio while continuing to earn any dividends and interest. Margin loans are subject to maintenance calls just as non-purpose loans are.
However, there are differences between the two. A margin loan is typically used for the sole purpose of purchasing more securities. A non-purpose loan, on the other hand, can be used for virtually anything other than purchasing securities. To obtain a margin loan you can only use the investments in one account as collateral, whereas you can get a non-purpose loan by using investments in several accounts.
Pros and Cons of a Non-Purpose Loan
Non-purpose loans have distinct benefits and drawbacks. For example, these loans are flexible and can be used for many purposes, but they often require borrowers to have investment accounts with a high value.
This chart gives an at-a-glance comparison of the advantages and disadvantages of non-purpose loans.
| Pros of a Non-Purpose Loan | Cons of a Non-Purpose Loan |
|---|---|
| May not involve a credit check | High asset value may be required |
| Allows borrowers to earn returns on investments | Typically has variable interest rates |
| You don’t have to sell investments to secure the loan so you avoid capital gains tax. | Subject to maintenance calls |
| Can be used to finance almost anything | Can’t be used for purchasing investments |
Pros of a Non-Purpose Loan
Non-purpose loans have several features that can make them attractive to borrowers.
May not require a credit check. Unlike traditional loans such as unsecured personal loans, a non-purpose loan might not involve a credit check. Instead, the lender may base the amount of the loan on the value of your portfolio.
Allows investment returns. Borrowers don’t have to sell their securities to obtain a non-purpose loan. They can continue to get possible returns on investments.
May avoid capital gains tax. Because you don’t have to sell securities to get a non-purpose loan, you won’t have to pay capital gains tax.
Provides flexibility. With a non-purpose loan, you can use the proceeds in almost any way you wish. For instance, you can use the money to pay off medical expenses, tide you over during a job loss, or for home improvement funds.
Recommended: Using a Personal Loan for Taxes
Cons of a Non-Purpose Loan
Along with possible benefits, there are some significant drawbacks of non-purpose loans to consider.
High asset value requirements. To qualify for a non-purpose loan, a lender typically requires you to have assets with a high minimum value of at least $100,000.
Variable interest rates. Non-purpose loans generally have variable interest rates, which means the rates can go up and down throughout the life of the loan. You may want to check personal loan rates to compare the interest rates of other lending options.
Subject to maintenance calls. The investments that serve as your collateral for a non-purpose loan are prone to market volatility, so you could be impacted financially. For instance, should the value of your securities go down, the value of your portfolio may no longer meet the collateral requirements for the loan, prompting a maintenance call. In that case, you might have to deposit money in your accounts or partially repay the loan.
Loan funds cannot be used for investing. Unlike margin loans, you can’t use the money from a non-purpose loan to purchase investment securities.
Recommended: How to Pay Tax on Personal Loans
The Takeaway
A non-purpose loan may be attractive to certain borrowers because it gives them the ability to use their investment securities as collateral while continuing to earn money on their investments. However, these loans tend to have high minimum balance requirements and variable interest rates, and they’re subject to maintenance calls, which could be financially challenging. Consider the potential pros and cons of a non-purpose loan to make sure it’s a good option for you.
You can also look into other lending products. While SoFi doesn’t offer non-purpose loans, we do offer personal loans with amounts ranging from $5,000 all the way up to large personal loans of $100,000. You can explore the different types of loans available, and shop around for the best rates, to decide which option is right fit for your borrowing needs.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
FAQ
What is the meaning of a non-purpose loan?
A non-purpose loan is an unconventional loan that allows you to use securities from different investment accounts as collateral for the loan. For some borrowers, the main advantage to this type of loan is that their investments stay intact, and they can potentially earn money from interest and dividends.
However, there are disadvantages to non-purpose loans. For instance, if the value of your investments drop, you may be required to add money to your accounts or repay part of the loan.
What is the difference between a purpose and a non-purpose loan?
A purpose loan uses investment securities as collateral and is typically used to buy more securities. A non-purpose loan is also backed by investment securities, but it can be used for almost any purpose, except for purchasing securities.
Is a non-purpose loan better than a purpose loan?
Non-purpose loans and purpose loans have different uses and requirements, and one isn’t necessarily better than the other. It mainly depends on what you’re using the loan for. A purpose loan is generally used for one specific purpose, typically to purchase securities. A non-purpose loan can be used for almost anything except purchasing securities. Only you can decide which type of loan is best for your intended use of the funds.
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