Wealthfront Portfolio Line of Credit

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bostondan
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Wealthfront Portfolio Line of Credit

Postby bostondan » Fri Apr 21, 2017 8:17 am

Wealthfront has launched a new product that allows customers to take up to 30% of their portfolio value out as a loan: https://www.wealthfront.com/portfolio-line-of-credit

I don't understand these things well enough, but at first glance it seems like a bad idea. The interest rate is advertised as being low, but I don't know how it compares to a standard mortgage. It seems similar or slightly higher. They also say it can be used as a down payment. Wouldn't a standard mortgage lender view this is a typical loan and consider it a 0% down mortgage? I assume that would make them less likely to provide you with the loan.

Also, I don't know much about margin lending, but isn't it risky for other reasons?

Can someone more expert explain the pros and cons of this new product? I don't personally have a Wealthfront account, and don't expect to, but I am interested in understanding it more.
“There may be times when we are powerless to prevent injustice, but there must never be a time when we fail to protest.” - Elie Wiesel

randomguy
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Joined: Wed Sep 17, 2014 9:00 am

Re: Wealthfront Portfolio Line of Credit

Postby randomguy » Fri Apr 21, 2017 10:09 am

bostondan wrote:Wealthfront has launched a new product that allows customers to take up to 30% of their portfolio value out as a loan: https://www.wealthfront.com/portfolio-line-of-credit

I don't understand these things well enough, but at first glance it seems like a bad idea. The interest rate is advertised as being low, but I don't know how it compares to a standard mortgage. It seems similar or slightly higher. They also say it can be used as a down payment. Wouldn't a standard mortgage lender view this is a typical loan and consider it a 0% down mortgage? I assume that would make them less likely to provide you with the loan.

Also, I don't know much about margin lending, but isn't it risky for other reasons?

Can someone more expert explain the pros and cons of this new product? I don't personally have a Wealthfront account, and don't expect to, but I am interested in understanding it more.


Loans based on portfolio values have been around forever. It technically isn't margin lending (i.e. you need to use margin loans to buy investments) but the basic idea is the same. Using loans versus selling has advantages and disadvantages. You have to decide what meets your requirements. Some mortgages allow using loans backed by collateral as downpayments. Borrowing from a 401(k) for example is pretty standard. If you are income limited this doesn't help (i.e. the factor in you have to payback the loan) but for people with liquidity issues, it can be helpful.

Personally the rates seem really to me. These are loans backed with 3x of assets that can be forced to be sold to pay the loan. That is pretty low risk.

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bostondan
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Location: Boston, MA

Re: Wealthfront Portfolio Line of Credit

Postby bostondan » Fri Apr 21, 2017 10:13 am

randomguy wrote:Personally the rates seem really to me. These are loans backed with 3x of assets that can be forced to be sold to pay the loan. That is pretty low risk.


Thanks for your thoughts.

Really high or really low? I think you left out a word.
“There may be times when we are powerless to prevent injustice, but there must never be a time when we fail to protest.” - Elie Wiesel

randomguy
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Joined: Wed Sep 17, 2014 9:00 am

Re: Wealthfront Portfolio Line of Credit

Postby randomguy » Fri Apr 21, 2017 10:20 am

bostondan wrote:
randomguy wrote:Personally the rates seem really to me. These are loans backed with 3x of assets that can be forced to be sold to pay the loan. That is pretty low risk.


Thanks for your thoughts.

Really high or really low? I think you left out a word.


high:) IB margin rates are ~2% for comparison.


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