What is a Non-Purpose Loan
A non-purpose loan can be an alternative type of loan that often involves using investment securities as collateral. Government regulations have certain requirements in place for the use of regulated non-purpose loans backed by investment securities.
BREAKING DOWN Non-Purpose Loan
Non-purpose loans are an alternative credit option that can involve complex structuring. Regulated non-purpose loans can be offered by brokerages and financial institutions with some specific regulatory documentation requirements.
Generally non-purpose loans may also be featured as a lending category across a variety of lending platforms. Typically lenders will require a borrower to specify a loan purpose for a personal loan. This is especially important with online lending platforms where retail and institutional investors choose to invest in loans by their particular purpose.
Non-Purpose Loan Agreements
Regulated non-purpose loans allow a borrower to use an investment portfolio as loan collateral with the proceeds unable to be used for purchasing, carrying or trading securities. This type of loan gives investors access to funds without having to sell their investments.
A non-purpose loan can be compared to a margin loan however there are some differences. This type of borrowing is considered an alternative to traditional margin borrowing because it allows multiple investment accounts to be used to secure a loan. Both non-purpose and margin loans will allow investors to continue to receive the benefits of their portfolio holdings, such as dividends, interest and appreciation. Both are also subject to a margin call if the value of the pledged securities declines below the specified limit.
Non-purpose loans are typically marketed as securities backed lines of credit (SBLOCs). They are generally more complex to obtain than a standard margin loan. They cannot be used to buy securities whereas margin loans are typically used for the sole purpose of investing in securities.
Brokerages offer margin loans on individual investment accounts. SBLOCs offer borrowers the opportunity to obtain a loan through the use of multiple account investments. Some SBLOCs may require a specific account to obtain the lending proceeds. Charles Schwab provides one example with their Pledged Asset Line of Credit product. Generally borrowers can access approximately 50% to 90% of their collateral assets as cash through the loan agreement.
Regulations require financial institutions to disclose whether a loan is a non-purpose or purpose loan. This is regulated by the Federal Reserve under Regulation U. Borrowers obtaining a non-purpose loan must complete a compliance form detailing the terms of the loan and its non-purpose obligations.
Loan Platform Categories
In general, online loan platforms may also offer non-purpose loans which are personal loans obtained by borrowers with no specific purpose for their use. Online lending investors in platforms such as Lending Club or Prosper will often invest in platform loans based on the loan’s purpose so this classification can also provide a consideration in investment risk analysis.