A loan against securities
Lombard loans are loans against pledged securities. The term “Lombard” dates back to the Middle Ages, when traders from the Lombardy region of northern Italy began conducting this type of lending. Nowadays, Lombard loans are more commonly referred to as “securities-backed financing”.
These loans are granted against readily marketable collateral, such as the cash equivalents, bonds, shares or investment fund units in your portfolio.
Since the value of the assets you pledge will fluctuate as the markets rise and fall, the amount of the credit line is always less than the value of the pledged assets. This difference is referred to as the security margin and is determined based on the value of each asset you pledge, taking into account its quality, its liquidity and the level of diversification among the pledged assets.
Seize investment opportunities or finance a purchase
Lombard loans are granted in the form of a current account credit limit and/or an advance with a fixed term of between one and 12 months and a set interest rate. If you opt for a credit limit, the interest due will be calculated on the amount of the credit drawn down, while for a fixed-term advance, the interest due is calculated on the amount of the advance, which can only be paid back at the end of the term.
Lombard loans give you quick and easy access to cash without having to sell your financial assets. In particular, you can:
- Seize investment opportunities on the financial markets through leveraging. You have leveraged your investment if, by using the credit, you have generated a return that exceeds the total cost of the loan.
- Finance – in full or in part – the purchase of securities, a property, etc.
It is very important to bear in mind that pledged securities are subject to fluctuations in market prices and exchange rates. If the securities lose value, the credit limit will be reduced accordingly. You will then be required to add to the pledged assets or sell some of your positions to restore the security margin. If you fail to do this, you may be required to partially repay the credit line.
1. Mr and Mrs D have invested part of their wealth in financial assets and now have a well-diversified portfolio.
2. The aim of this investment is to grow their capital over the long term.
3. Their daughter, Emilie, wants to study marine biology at MIT. Mr and Mrs D would also like to take a number of long trips once they retire.
4. To finance their daughter’s studies abroad and still grow their capital, they decide to take out a Lombard loan so that they don’t have to sell their financial investments.
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