M1 Finance Has A New Feature That Lets You Borrow Against Your Portfolio

M1 Finance, the Chicago-based roboadviser that offers automated investing for free, has begun allowing portfolio lines of credit to some clients.

The feature, called M1 Borrow, launched in June and is available to all clients on the platform with at least $25,000 in their account — about half of M1’s current customers.

“We’re saying it’s the simplest and lowest cost way to borrow money,” said Brian Barnes, founder and CEO of M1 Finance.

A Convenient Borrowing Solution

M1 Borrow users can borrow up to 35 percent of their portfolio’s value at a 3.75-percent interest rate, far lower than typical loan rates in the double digit range, and can secure approval instantly without a cumbersome borrowing process.

There is no repayment schedule, as Barnes said M1 is content to charge the fixed interest rate and allow users flexibility in how they repay.

“The ease is pretty unmatched. It’s really just go in, type in the amount that you want, click a button and it’s instantly available in your M1 account,” he told Benzinga. “And if you want it into your bank account, it’ll be transferred the next business day.”

Barnes said they’re targeting people who may need a loan but don’t want to tap into their assets and pay capital gains taxes as a result.

“Most people try to paint the world that you’re either all debt or all assets. A lot of people have savings and investments and an auto loan or mortgage,” he said.

“And the way that they borrow is very case by case. If you have a $250,000 investment portfolio, you shouldn’t have to borrow for an auto loan at auto loan rates. You can borrow using that portfolio and you can use that cash however you want.

“This gives you instant liquidity against your portfolio in a very tax-advantaged way.”

The Obvious Risks

Of course, investors shouldn’t borrow against their portfolio without knowing the biggest risk: exposure to a margin call. Because a user’s portfolio is collateral for the loan, they could be forced to sell investments if the portfolio value drops a certain amount.

In M1 Borrow’s case, a portfolio would have to fall 50 percent in value if the maximum allowed amount was borrowed before the company stepped in.

Increased risk is what allows M1 to offer such a low rate and is why the loan amount is capped at 35 percent, Barnes said.

M1’s Long-Term Vision

Ultimately, M1’s long-term vision is to offer a way for people to invest, borrow and spend from the same account, Barnes said.

M1 Borrow not only accomplishes the second item on that list, but it provides a source of revenue for the company, which has raised $9 million in venture capital since its 2015 launch.

“So you can imagine a world where an M1 account more or less replaces your checking account … and any money over a certain threshold is automatically swept into a custom portfolio that you’ve designed,” Barnes said.

“It moves into a world where you can invest for free … and anytime you need to tap into [your portfolio], you can do it in a tax-advantaged way and you can do it with very low rates.”