Borrowing Against Your Assets: What It Means and How It Works

Can you borrow against assets? Yes, and it’s a strategy used by many expats, investors, and business owners to unlock liquidity without selling.

Borrowing against your assets means using what you already own as collateral to access a loan.

But how does it actually work and what exactly can you borrow against?

This post covers common questions, such as:

• How does borrowing against assets work?
• What assets can you borrow against?
• Can you borrow against your assets to avoid capital gains tax?

We’ll delve into the mechanics, pros and cons, and which assets might be eligible.

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Some facts might change from the time of writing. Nothing written here is financial, legal, tax, or any kind of individual advice, nor is it a solicitation to invest or a recommendation of any specific product or service.

What does borrowing against your assets mean?

Instead of selling your holdings, you pledge them to a lender in exchange for liquidity, while retaining upside potential (and downside risk) on the underlying asset.

How to borrow from an asset

1. Choose your asset (stocks, bonds, ETFs, 401(k), life insurance).
2. Select the loan type: margin loan, securities-backed line of credit, 401(k) loan, policy loan, etc.
3. Apply with a lender or plan administrator, providing documentation of your holdings.
4. Agree to terms: loan-to-value ratio, interest rate, repayment schedule, and collateral requirements.
5. Receive funds while your asset remains pledged.
6. Repay according to the agreed schedule to avoid forced sale or policy lapse.

How borrowing against stock works

You open a margin account or a securities-backed line of credit (SBLOC). The broker or bank values your eligible shares and advances a percentage, often at least 50% of their market value.

Borrowing against stocks pros and cons

Pros:

• Quick access to cash without selling
• No capital gains taxes triggered
• Flexible use of proceeds

Cons:

• Margin calls if your portfolio value drops
• Potential forced liquidation at unfavorable prices
• Interest charges and maintenance fees

How borrowing against 401k works

Your retirement plan (401k) allows you to borrow up to 50% of your vested balance. You repay principal plus interest (often prime rate plus margin) via payroll deductions.

Borrowing against 401k pros and cons

Pros:

• No credit approval needed
• Interest paid goes back into your account
• Lower rates than many personal loans

Cons:

• Missed market gains on borrowed funds
• Loan becomes due if you leave your employer
• Potential tax penalty if not repaid

How borrowing against bonds works

You pledge high‑quality bonds as collateral to a lender.

The bonds remain your property, and you continue to earn interest or dividends on them during the loan period.

The lender evaluates the face value of the bonds based on its credit rating and remaining maturity, then decides the loan amount you can borrow.

Interest is charged on the borrowed amount, and your bonds remain in your account but are restricted until repayment.

Pros and cons of borrowing against bonds

Pros:

• Lower interest rates than unsecured loans
• Predictable collateral value
• No capital gains event when borrowing

Cons:

• Credit risk if issuer defaults
• Reduced yield if coupons are redirected to pay interest
• Potential margin calls if bond market values plunge

How to borrow against ETF

Like the other securities, lenders assess the market value, liquidity, and quality of your ETFs. Highly liquid, blue-chip ETFs are preferred.

Pros and cons of borrowing against ETF

Pros:

• Diversified collateral
• Lower volatility ETFs offer more stable borrowing base
• Simpler margin requirements compared to individual stocks

Cons:

• Limited loan-to-value (LTV) for thematic or niche ETFs
• It could be harder to sell or borrow during market stress

How does borrowing against life insurance work?

Borrowing against life insurance works by taking a loan from the cash value accumulated in a permanent life insurance policy, such as whole life or universal life. 

Term life policies do not have cash value and cannot be borrowed against.

The insurance company lends you money using the policy’s cash value as collateral, without requiring a credit check or lengthy approval process. 

Pros and cons of borrowing against life insurance

Pros:

• No application process or credit score needed
• Competitive interest rates
• Flexible use of funds

Cons:

• Unpaid loans reduce the death benefit
• Policy may lapse if loan interest pushes costs too high
• You can only borrow once sufficient cash value has accumulated

How does loan against property work?

A loan against property (commonly a home equity loan) allows you to borrow money using the equity you have built up in your home as collateral.

Equity is the difference between your home’s current market value and the outstanding mortgage balance.

The lender assesses your home’s appraised value and your existing mortgage to determine how much you can borrow.

Interest rates are usually fixed, and the loan functions like a second mortgage. If you fail to repay, the lender can foreclose on your home to recover the debt.

Pros and cons of borrowing against your home

Pros:

• Lower interest rates than personal or credit card loans
• Access to large amounts of capital
• Retain ownership and potential appreciation
• Interest may be tax-deductible (check your local laws)

Cons:

• Risk of losing your property if you can’t repay
• Slow approval process

Borrow against assets to avoid capital gains tax

Instead of selling an asset and triggering capital gains taxes, some investors choose to borrow against it.

• You keep ownership.
• You defer taxes.
• You gain liquidity without realizing a taxable event.

It is a widely used tax strategy, often referred to as the “buy, borrow, die” approach. 

This strategy is especially favored by wealthy households to minimize tax burdens on large, appreciated portfolios.

FAQs

Can I get a loan against my investments?

Yes, you can. It’s called a securities-backed loan.

How do the rich borrow against assets?

They leverage large portfolios or real estate holdings to secure low-interest loans, sometimes indefinitely rolling over debt while maintaining ownership of appreciating assets. 

This approach, dubbed buy, borrow, die (as mentioned earlier), allows them to live off borrowed funds while their assets grow.

They typically have access to sophisticated lending solutions, such as portfolio lines of credit or securities-backed loans, with favorable terms.

How does borrowing against your own money work?

It usually means taking a loan against a cash-value life insurance policy, retirement account, or savings, where you’re using your own funds as collateral to get a low-interest loan.

Can I use a savings account as collateral?

Yes. You can take a secured personal loan using your savings account or certificate of deposit (CD) as collateral. These loans have low rates but you can’t access the collateral until it’s paid off.