Also known as non-purpose loans, beware these pitfalls if you use your portfolio as collateral to borrow from your broker. Thinkstock By Eleanor Laise, Senior Editor From Kiplinger's Retirement Report, September 2015 A growing number of brokerage firms are encouraging customers to take out loans to cover taxes, vacations, luxury goods or other expenses, using the securities in their brokerage accounts as collateral. The pitch: Customers get quick and easy access to credit at competitive interest rates, allowing them to meet expenses without selling off investments and potentially incurring taxable gains.See Also: SLIDE SHOW: 10 Reasons You Will Never Get Out of Debt These "non-purpose" loans are distinct from margin, another form of securities-based lending. Traditional margin loans are generally used to buy securities, whereas non-purpose loans can be used for any other purpose -- even, as Morgan Stanley's Web site puts it, for "a 1963 Ferrari GTO, just because." Sponsored Content But as more firms offer these loans, the arrangements are drawing scrutiny from regulators. Compared with traditional bank loans, non-purpose loans generally are easier to obtain, and "that's what makes them attractive in some ways," says Susan Axelrod, executive vice-president of regulatory operations at the Financial Industry Regulatory Authority. But they also come with significant risks, and customers "should think carefully before taking one out," she says. Advertisement Brokerage firms are pushing non-purpose loans as they seek to become less reliant on trading commissions and develop more predictable sources of revenue, such as interest income. Combine that trend with the strong markets that have given many customers high portfolio values -- and therefore high collateral value -- and "it's a perfect storm" for non-purpose loans, says Paul Meyer, principal at Securities Litigation & Consulting Group, which provides research and expert testimony in securities cases. At first glance, brokerage customers may find non-purpose loans appealing. The amount of credit you're offered is based largely on the value of the securities you're using as collateral, rather than on scrutiny of your credit rating or debt levels. That means there's relatively little documentation required and customers may be able to get the cash within a couple of days. Borrowers are often charged a variable interest rate that's based on the 30-day London Inter-Bank Offered Rate (Libor). Typical rates are about 2 to 5 percentage points above Libor, depending on the amount the customer is qualified to borrow -- or roughly 2.2% to 5.2%. Watch Out for the Pitfalls Unlike with traditional loans, borrowers repay the loans when they wish -- but meanwhile, interest charges are adding up. "If you're not getting a bill every month, you tend to just let it sit," Meyer says. "And that can be a very pernicious problem after a while." Even bigger problems arise if there's a market plunge and the value of securities you've pledged as collateral drops below the minimum threshold set by the brokerage firm. You may be required to promptly pay down your loan or deposit additional collateral. The firm also has the right to sell off some of your securities without notifying you, potentially triggering big capital-gains taxes. Advertisement Firms offering the loans say they review a number of factors to make sure they're suitable for clients. At Morgan Stanley, for example, advisers and their clients "assess the clients' investment goals and financial situation, including whether the proposed increase in the client's debt is consistent with the client's risk tolerance and time horizon," the firm said in an e-mail. Still, customers should consider brokers' potential conflicts of interest before taking a non-purpose loan. If you take the loan instead of selling off some of your securities to cover your cash needs, the firm continues earning any asset-based management fees you pay on that money. The broker can also earn a commission, often based on a percentage of your loan balance. The best alternative for customers: Simply sell securities to meet your expenses, Meyer says. As investors near retirement, "they should be gradually eliminating debt," he says. A non-purpose loan is just "one more expense to carry in retirement."