|
Debt consolidation can occur with consumers borrowing against the value of their stocks, bonds and other securities held in a margin account at a brokerage firm. This method of debt consolidation, known as margin loans, can save consumers in interest costs compared to installment loans or lines of credit.
Brokerage firms allow consumers to access the margin loan by writing a check or using a debit card tied to the margin account. Once consumers receive the money, they direct the proceeds to paying off all debts. No fixed repayment plan exists for margin loans, which can extend indefinitely and benefit debt consolidation. Margin loans carry a floating interest rate, usually less than 8 percent, which compliments debt consolidation by allowing consumers to pay less interest than the rates levied on existing debt. Debt consolidation with a margin loan allows consumers to deduct 75 to 90 percent from the amount of account equity, or net investment. However, debt consolidation with a margin loan entails several risks that consumers cannot control. If the market value of securities declines, the broker may force the consumer to deposit more cash in the account to compensate for the lowered value of the stock. Brokerage firms refer to this demand as a margin call. When consumers use a margin loan, the risks of meeting the margin call can negate the purpose of debt consolidation. If consumers cannot meet the margin call, the broker sells the securities. Debt consolidation with a margin loan can provide consumers with an effective and convenient method to pay off debt, as long as consumers consider the risk of declining securities. Brad M is a financial writer for http://www.creditsolutions.com specializing in personal debt. |
