I’m in my early 20’s and taking out debt is actually… pretty difficult. Banks require several months worth of bank statements, stable proof of income, cosigner sometimes, good credit. All of this to get approved for a 7.99% interest rate on a personal loan with a strict repayment schedule.
Meanwhile on margin I don’t have to do paperwork at all, I don’t have payment plans, and I can take out several thousands at a 2% interest rate in a few minutes. I can use the money for practically anything, not just buying stocks.
Why is this margin debt so exceptionally easy to take out?
In: Economics
Margin is secured by assets that are held at the firm providing you the loan. Margin is also callable, which is very important. This means that the loan provider can see in real time what the risk of you going broke is and at any point call your loan and even liquidate your other assets if needed.
Contrast this with a home loan where although there is also collateral the bank cannot just ask you to pay them back at their own discretion. It also takes much longer to collect if things go tits up.
Margin is callable. That personal loan has that strict repayment schedule – they cant just say that you need to pay it all now immediately because you are now more at risk than when you took out the loan. With margin, they can.
When I was flipping houses in my late 20s the Competitive Equality Banking Act of 1987 went into effect, several banks changed ownership, and my bank called my loans and I went from a 2 million net worth to about half that, essentially overnight.
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