Lombard loan: short-term, low-interest financing for securities investors
In connection with securities transactions, there is sometimes talk of so-called “Lombard loans” – a term that is hardly known to many consumers.
What is a Lombard loan?
Lombard loans are loans that are secured with collateral – for example in the form of securities or precious metals. The term originated from the Italian region of Lombardy, where money was first given in Europe in the Middle Ages against the deposit of a pledge.
In the business with private bank customers, securities Lombard loans are particularly common today. As a security, the borrower provides the bank with his shares, bonds or fund units in the securities account.
However, the maximum loan amount does not correspond in full to the current market value of the securities, since the bank usually makes a haircut when evaluating them. The level of this discount depends on the price risk of the securities. For example, foreign shares are usually only recognized as security to 50 percent, with domestic default values, the loan limit often increases to 60 percent of the market value. Bonds from issuers with a good credit rating, on the other hand, can serve as collateral up to an amount of 80 percent of the nominal value.
Depending on the contract, Lombard loans are offered as fixed-term loans or – similar to the overdraft facility on the checking account – in the form of a credit facility. The advantage compared to the overdraft facility is the significantly lower interest rate because the bank can calculate lower risk costs due to the collateral deposited.
For what purposes are Lombard loans suitable?
The Lombard credit line is granted without a specified purpose – the purchase of additional securities is just as possible as the financing of the next vacation trip or the new car.
Example: A manager expects an already agreed bonus payment of 10,000 in two months. He would like to use the money to buy a car today, but avoid selling securities from the depot. Intermediate financing via a Lombard loan is then significantly cheaper than taking advantage of the overdraft facility on the checking account. In addition, the securities remain in the custody account, so that no losses result from the fact that papers have to be sold first and then bought again a short time later at a possibly higher price.
The Lombard loan from the Astro Bank
For investors who have a Best Bank securities account with Astro Bank, the Lombard loan is available as a low-interest solution for short-term financing. The so-called credit check is based on customer information. Credit documents are not to be submitted!