Beyond Basic Borrowing

Let’s be honest: Many people borrow as part of their financial plan. For example, they borrow to buy a home, pay taxes, finance personal interests, cover business costs, college educations or other expenses.

Some of these expenses are planned, while others are not. And it doesn’t always make sense to borrow a lump sum. As a result, over time people may end up with a cumbersome mix of mortgages, home equity loans, student loans, credit cards and personal loans.

This piecemeal approach to borrowing can result in suboptimal loan structures and pricing, which may create challenges with matching cash flows to debt payments. Furthermore, taking an uncoordinated approach to borrowing can impede your ability to stay the course of a well-thought-out investment strategy.

To avoid this, consider periodically reviewing your debt structure. Taking a holistic look at your various sources of debt could potentially help you identify opportunities to:

• Reduce interest costs
• Enable faster debt repayment
• Access additional sources of liquidity for unexpected cash needs
• Better manage cash flows

Leveraging the Power of Your Investments

When it comes to taking a more strategic approach to debt management, one of the most powerful resources at your disposal is your investment portfolio. Using your investments as collateral for a securities based loan may provide you with convenient and competitively priced access to funds you can use to consolidate multiple loans into a single line of credit. This strategy offers:

• Flexible repayment options: Unlike other forms of debt that have fixed repayment schedules and charge late payment fees, securities based loans can give you flexible repayment options.  For example, you can pay principal or interest, or as long as you maintain sufficient collateral, you can allow interest to be added to the principal.  In addition, the application process is often easier and faster than applying for other types of loans.  
• Line of credit: Also, because a securities based loan is a line of credit, you can use available funds whenever future purchases or unforeseen events occur, without going through the application process all over again.
• Lower rates: Securities based lending may also offer a potentially lower rate than other forms of debt, including unsecured loans and credit cards. A lower interest rate may enable you to pay down debt more quickly and better manage cash flows so you can use available funds for other purposes.
• Additional benefits: Borrowing against securities may provide additional benefits, including the potential to maintain your long-term investment plan, as well as helping avoid the tax consequences associated with selling appreciated investments.

Borrowing against securities may not be appropriate for everyone. Only certain types of securities are eligible for this type of loan, and there are some risks, including possible maintenance calls on short notice, and that market conditions can magnify any potential for loss.

Looking at Your Entire Financial Picture

Since debt is an important part of your financial picture, managing it requires a strategic approach. For more ideas on how to do so, Morgan Stanley clients should contact their Financial Advisor.