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Frequently asked questions
Who benefits the most from loans that margin lenders offer?
A margin loan is not a favourable investment option for investors of all stripes because of the tremendous risks involved. Nevertheless, this type of investment is best for seasoned investors. These people are reasonably experienced, and they are proactive in their investing habits. Moreover, investors who take out margin lending manage their investment portfolio actively. They comprehend the risks thoroughly before and after taking out the loan, especially the dangers involved with borrowing funds to invest in shares, and shares investing in general. Investors who take out the loan that margin lenders offer are involved, confident, and are capable of transferring more funds into their settlement account if their equity dips, too. They view this type of borrowing as an active investment instead of a passive one.
What key terminologies should I learn when taking out a margin lender's product?
When taking out a margin loan, it pays if you understand two of its essential terminologies. Have a look at them here:
A) MARGIN CALL
When the equity in a margin account nosedives below a pre-set level, margin lenders issue a margin call to an investor. Every individual margin lender sets their requirements and degrees. If you took out a margin loan, you could feel concerned when you get a margin call because it means that your loan provider or broker can already sell your assets. It is because you cannot make up the deficit with your money. Plus, your investment has decreased in value.
B) LOAN TO VALUE RATIO
Similar to a mortgage, margin lenders use the expression “loan to value ratio” or LVR to evaluate how risky your loan is. The value of your security is the basis of your LVR. Moreover, this concept demonstrates how much financing you can borrow as a percentage or proportion of your total investment. The LVR works, for example, with your stocks having an LVR of 75 per cent. Your provider will offer you 75 per cent if it is your desired amount, as long as you come up with the remaining 25 per cent.
When availing loans that margin lending providers offer, what interest rate do I need to settle?
Similar to paying interest rates of personal loans, you can select fixed and variable rates when taking out a margin loan. The variable rates typically begin lower, compared to their fixed alternatives. Plus, they can be more flexible. On the other hand, fixed rates offer more certainty around your repayments.