As with all forms of debt, SBLOCs have risks and are not appropriate for all clients. Some risks include:
- Market Volatility & Maintenance Calls - If the market value of a collateralized account declines below a minimum threshold, The Bancorp may require you to deposit additional funds as part of a maintenance call (or in more extreme situations, force liquidation of securities at an inopportune time–this is rare).
- SBLOCs Involve Hard Credit Pulls - An SBLOC underwriting with The Bancorp will involve a hard credit pull by The Bancorp. The credit pull reaches all 3 credit bureaus. A hard credit check can impact your credit score.
- Cash Reserve Withdrawal Restrictions - Withdrawals from Cash Reserve balances can be impacted by opening an SBLOC. This is because Cash Reserve balances are part of the same legal account as your taxable investing account (individual cash reserve balances are part of individual taxable accounts and joint cash reserve balances are part of joint taxable accounts). Thus, a withdrawal from your Cash Reserve could be blocked entirely, could decrease the Daily Allowable Distribution (DAD) corresponding to your SBLOC, and/or could potentially cause a maintenance call.
- Regulatory & Lender Restrictions – Funds cannot be used for purchasing additional securities or to fund margin loans, and some lenders impose restrictions on asset types that qualify as collateral.
- Variable Interest Rates – For now, Betterment will only be allowing variable-rate loans for SBLOCs. The Bancorp does allow 36-month fixed-rate loans, but Betterment is not offering this option at this time. The Bancorp’s lending rates are based on a spread relative to the WSJ Prime Rate. The Bancorp has different spreads depending on the size of the SBLOC being underwritten (the larger the SBLOC, the lower the interest rate).