1 min read

What are Margin Loans?

EDIT: After publishing last night, my alarm bells were ringing. 'This is too good to be true.' So asked my Dad what was up and yooooo, these loans have a VARIABLE interest rate, so the interest can shoot up at any time.

Mi padre said he'd consider maybe taking a loan like this on anything he'd pay off within one year, but beyond that timeframe, they can get pretty risky.

Just read this interesting post by Mr. Money Moustache.

Imagine never having to pay capital gains taxes to sell stocks. That's sorta what a margin loan could be.

So basically, if you want to make a large purchase like a home, and you need more cash, you can sell your stocks right? But you have to pay capital gains taxes (here's a capital gains calculator) and you lose out on having your money in the markets. According to Mr MM, you can actually take out a Margin Loan and avoid a lot of these problems.

How it works:

  • You create a margin account (not a portfolio margin account, there's a difference) w/ a Brokerage (he recommends Interactive Brokers)
  • You transfer (NOT sell) your shares into this account. Remember, if you sell the shares, you incur capital gains taxes.
  • For new accounts, you gotta wait 30 days for security purposes (so plan ahead)
  • Withdraw cash from your account using the margin loan feature-  you can withdraw up to 50% of your shares in cash
  • This wire transfers money directly into your checking account.
  • You keep the stocks too!
  • Now, you're borrowing money from yourself. You owe interest on this cash, but with Interactive Brokers it's super low (from 1.6% down to .75%)

Whaaattttttt. That's so fucking cool!

If you never have to sell your shares, you can keep those gains on paper instead of out in the real world – perhaps even for your entire lifetime.
As long as you’re comfortable with the margin loan interest rate (which will not always be as low as it is today but should in general remain cheaper than a mortgage), you can borrow against your growing pool of investments for everyday living expenses, house purchases, and even charitable contributions. -Mister Money Moustache

Ps- I wrote this to teach myself how margin loans work. If I got something wrong, plz tweet me the error and I'll correct it.