How to Borrow Against Your Assets Instead of Selling Them

If you need cash, you don’t necessarily have to sell your assets.

Many people borrow against assets they already own instead of selling them. Think about your home, investment portfolio or vehicle. This type of financing is called asset-backed lending.

Here’s how asset-backed lending works, its benefits and risks, and the assets lenders might accept as collateral.

What is asset-backed lending?

Asset-backed lending is a type of financing that allows someone to use an asset they already own as collateral for a loan or line of credit. The borrower keeps ownership (but maybe not possession) while using the asset’s value to secure financing.

Because asset-backed loans are secured, lenders generally view these loans as less risky than unsecured loans. Borrowers put their collateral at risk, and, as a result, are usually more motivated to make payments. Lenders often offer lower interest rates or APRs for asset-backed loans because a borrower has pledged collateral to secure performance under the loan.

What does it mean to borrow against an asset?

Borrowing against an asset means using something you own as collateral to secure a loan. You don’t have to sell the asset to access cash.

A lender usually puts a legal claim on the asset, such as a lien on a home or possession for other items, while the loan is outstanding. If the borrower pays back the loan as agreed, the lien is removed or the asset is returned. If a borrower stops making payments, the lender may have the right to take and sell the asset to recover their losses.

What are some common types of asset-backed loans?

Many types of assets can be used as collateral for an asset-backed loan. Some common asset-backed loans and their supporting collateral include:

Home equity loans and home equity lines of credit use a homeowner’s equity.
Securities-backed lines of credit use investments, such as stocks, bonds, exchange-traded funds or mutual funds.
Auto title loans use a vehicle’s value.
Secured credit cards use a refundable cash deposit.
Bitcoin-backed loans and bitcoin-backed lines of credit use bitcoin.
Secured personal loans might use cash in a savings account, a certificate of deposit or even fine art or other qualifying assets.
Pawn shop loans could use electronics, jewelry or other valuables.

Is an asset-backed loan the right choice for me?

Asset-backed lending can help borrowers access cash without having to sell long-term assets.

For example, a homeowner can use the equity they’ve built to get a home equity loan or home equity line of credit while continuing to own the property. Similarly, investors may use a bitcoin or securities-backed line of credit to continue their long-term investment strategy and maintain ownership of their investments.

Borrowers may also qualify for lower rates with an asset-backed loan.

What are the risks of asset-backed lending?

Asset-backed lending can be risky. If you can’t repay the loan, you could lose the asset that you pledged as collateral.

Some assets, such as stocks and bitcoin, may fluctuate in value. Lenders typically require borrowers to stay within a particular loan-to-value ratio, meaning you can’t borrow the asset’s full value. If the collateral drops in value, you may need to repay part or all of the loan or add more collateral to avoid a sale of your assets to repay the loan partially or in full.

The bottom line

Asset-backed loans allow qualifying borrowers access to cash without selling their assets. These loans can provide lower interest rates because they are backed by collateral, but borrowers risk losing the asset they pledged if they fail to repay the loan.

This post is for informational purposes only and does not provide any financial, investment or tax advice. The information presented may not be suitable for your individual circumstances. Before making any financial decisions, consider consulting a qualified professional who can provide advice based on your specific situation.