What is a Pledged Asset Line (PAL)?
The financial industry is full of not-so-obvious tips and tools that can help you use your wealth better. One of these tools is called a Pledged Asset Line (PAL), and using a PAL effectively can help you manage your wealth more effectively.
If you have questions about Pledged Asset Lines or are interested in learning more about Chicago Partners, please contact us today!
What is a Pledged Asset Line (PAL)?
According to Charles Schwab, a pledged asset line is “an uncommitted, non-purpose securities-based borrowing solution that allows individuals to leverage eligible assets in their investment portfolios as collateral for a secured loan.”
In normal language, a PAL is a line of credit backed by a taxable investment portfolio.
What does a Pledged Asset Line do?
A pledged asset line can be useful in many ways, each depending on what someone’s goals and objectives are. For example, a PAL can be used to pay off credit card debt quicker by paying off a higher-interest-rate loan (from the credit card) with a relatively lower-interest-rate loan, which effectively reduces the total amount of interest paid on the overall debt.
Here are some other examples of how a PAL can be used:
- Obtain a lower-interest-rate line of credit
- Paying down higher-interest debt (example above)
- Supplementing college education expenses
- Paying down a mortgage
- Paying down a car loan
- Increasing liquidity without realizing capital gains tax
Again, depending on someone’s goals and objectives, they might choose to use a PAL for one of the above items or all of them. It’s ultimately up to them.
An investor can access his or her pledged asset line with checks or wire transfers.
What Doesn’t a Pledged Asset Line do?
While a PAL can be a helpful tool in managing interest-related finances, some areas of finance are off-limits.
For example, an investor cannot use a pledged asset line to purchase more securities. This would be dangerous for the lending institution. An investor cannot transfer the PAL money to another brokerage account, and they cannot use one PAL to pay down another PAL.
Will a Pledged Asset Line help me and my family?
Is a Pledged Asset Line risky?
Like other investment tools, a PAL does carry a degree of risk. Although an investor receives an extended line of credit, they will ultimately have to pay off that line of credit, like any other loan.
While there may not be an expiration, maturity, or monthly payment requirement on the PAL, we encourage investors to at least pay the interest on the PAL monthly.
Taking that a step further, the custodian who offers you the PAL has the right to liquidate securities in your account in order to cover the PAL interest charges. Finally, if the value of the account is less than the minimum loan value, the custodian may require payment or liquidate securities to cover the deficit, which could leave the investor with unwanted tax consequences.
Our financial advisors work with clients who successfully manage and effectively use their pledged asset line to bolster their financial situation. If you are interested in learning more about whether a PAL is right for you, you can contact us online or give us a call at (312) 757-5543.
It's Never Too Late to Get Started
A common misconception is that financial planning around an inheritance only matters in the immediate aftermath. In reality, many people spend months and sometimes years sitting on inherited assets without a clear strategy. Whether you're dealing with a concentrated stock position, uninvested cash, or a mix of accounts you've never quite organized, there's always value in bringing structure and intention to what you've received.
The key is working with advisors who understand the full picture: investments, taxes, estate planning, and the personal values that ultimately drive every financial decision. An inheritance is more than a financial event; it's an opportunity to build something that lasts.
Sources:
- 1Zweig, Jason, Value Should Do Better. But When Is Anybody’s Guess, Wall Street Journal, April 27, 2018.
- 2JPM Guide the Markets, U.S., 2Q 2018, as of March 31, 2018, p 9.
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