Mistakes Made In Stock Loan Lending
From the perspective of the lender, stock loans can have a number of pitfalls if not handled correctly.
Usually, this occurs as a result of an unregistered, third-party lender attempting to operate outside of the appropriate regulations. These lenders often market their loans as “non-recourse” in nature, which means that there is very little risk to the borrower. And this part is true, however, it results in certain serious risks for the lenders.
In a non-recourse loan, it is agreed upon beforehand that the lender will take no further action to collect on the loan other than retaining the stocks which were given as collateral. Hiring collection agencies, and further asset seizure are not options for the lender. This means that borrowers can simply choose not to pay their loans back at the end of the lending period if the stocks they gave as collateral have depreciated to less than what repayment would cost, and there is nothing the lender would be able to do about it.
Given that many loans come with high interest rates (as much as 15 percent), it does not take much fluctuation in the market for lenders to find themselves holding onto stocks that are worth less than the loan repayments for which they are collateral. This puts the lenders at a disadvantage since they are bound by the terms of the loan and cannot ask for further collateral. They rely on the goodness of the borrower to pay back the loan: a decision that would be financially irresponsible.
Some lenders will lend money against a stock that will eventually crash, and the borrower had signed a personal guarantee, making the borrower responsible for the entire loss of the stock.