Line of credit
Line of credit
Does Vanguard offer lines of credit against assets held at Vanguard?
Edit: the funds from the line of credit would be used to buy a vacation house
Edit: the funds from the line of credit would be used to buy a vacation house
Last edited by RoadRat on Thu Sep 16, 2021 4:32 pm, edited 1 time in total.
- whodidntante
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Re: Line of credit
Sure, if you want to pay one of the highest interest rates possible for a secured loan. You'd be far better off elsewhere.
Re: Line of credit
It is called "margin".
I used to work the margin desk. I don't recommended it unless you have a vast willingness to take risk (which you may have) and a vast ability to take on risk (which Musk has but the vast majority of people do not).
I used to work the margin desk. I don't recommended it unless you have a vast willingness to take risk (which you may have) and a vast ability to take on risk (which Musk has but the vast majority of people do not).
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Line of credit
Are margin loans strictly for buying other securities? I really don't know.
Specifically, I'm inquiring about pledging VBTLX assets to secure a line of credit to buy a second house. And then paying only the interest.
- whodidntante
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Re: Line of credit
You can withdraw cash on margin if you like. I would just sell VBTLX instead though because Vanguard charges way too much and VBTLX has a negative real yield.
Re: Line of credit
Schwab has a PAL – – personal asset line for Schwab account holders. It’s not a margin loan but it is secured by securities at Schwab.
Our local bank offers a line of credit secured by securities on deposit at their brokerage division.
Depending upon circumstances of the borrower and the amount of credit involved, the rates can be very competitive.
Our local bank offers a line of credit secured by securities on deposit at their brokerage division.
Depending upon circumstances of the borrower and the amount of credit involved, the rates can be very competitive.
Last edited by J295 on Thu Sep 16, 2021 6:00 pm, edited 1 time in total.
Re: Line of credit
Trying to figure your ask: get ultra-cheap margin loan., buy/payoff house., and only pay margin interest (optionally) — thus achieving: extreme-low payment optionality (both interest as well as Principal equivalent payments optional). The gotcha though - margin generally not meant for longer-term needs — then again, you may have figured a solution - do share !!
If you get right contact and decent sized brokerage portfolio: Fidelity, Schwab, or ETrade -- currently offer great margin rates with good negotiation:
Fidelity - 1.25%
Schwab - 1.26%
Just say that - was able to negotiate ETrade margin just about: 1% (much better rate than: 1.25%)
Then again - don’t consider margin/HELOC for the sake of low variable rates, but towards helping you with possible short-term financing a small amount., May be take limited margin to kill PMI, and/or helping towards keeping AGI in shape (ACA or not breaching IRMAA tiers, or not to lose any tax credits at certain MAGI tiers) for select years.
Eventually at one point you have to pay back these loans/debts — so long you keep those debts in small/limited amounts, short term, and that you have means to pay those off., such ultra-low margin loans could help a bit. Then again, don’t necessarily consider margin based investing as a goal in itself, you never know which direction markets gyrate ..
If you get right contact and decent sized brokerage portfolio: Fidelity, Schwab, or ETrade -- currently offer great margin rates with good negotiation:
Fidelity - 1.25%
Schwab - 1.26%
Just say that - was able to negotiate ETrade margin just about: 1% (much better rate than: 1.25%)
Then again - don’t consider margin/HELOC for the sake of low variable rates, but towards helping you with possible short-term financing a small amount., May be take limited margin to kill PMI, and/or helping towards keeping AGI in shape (ACA or not breaching IRMAA tiers, or not to lose any tax credits at certain MAGI tiers) for select years.
Eventually at one point you have to pay back these loans/debts — so long you keep those debts in small/limited amounts, short term, and that you have means to pay those off., such ultra-low margin loans could help a bit. Then again, don’t necessarily consider margin based investing as a goal in itself, you never know which direction markets gyrate ..
Last edited by sc9182 on Thu Sep 16, 2021 6:07 pm, edited 1 time in total.
Re: Line of credit
VBTLX sec yield is 1.28% right now, doesn't really made financial sense to pledge that and get a loan with interest rate higher than 1.28%. For pledged asset loan, the best I heard is around 1.2-1.3%, nothing there to gain financially, unless you somehow has lots of CG embedded in your VBTLX, which seems unlikely.
- FreddieFIRE
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Re: Line of credit
Nobody is paying 1.25% for margin at Fidelity.
A house and a job. Once the American dream. Two things I'll never again have. Life is simple (and good).
Re: Line of credit
- whodidntante
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Re: Line of credit
Since they only pay .01% on cash, earning 1.05% is also a great deal for Fidelity. A classic win-win.
Re: Line of credit
You can take cash out and do whatever you want with it. It is one of the advantages of a margin loan. Instant cash, no credit check, no questions. Blow it all in Vegas over a weekend. I have seen fortunes squandered this way.
This is a false line of reasoning. Most people get muddled when thinking about dividends. And about margin and "paying only the interest".jarjarM wrote: ↑Thu Sep 16, 2021 6:01 pm VBTLX sec yield is 1.28% right now, doesn't really made financial sense to pledge that and get a loan with interest rate higher than 1.28%. For pledged asset loan, the best I heard is around 1.2-1.3%, nothing there to gain financially, unless you somehow has lots of CG embedded in your VBTLX, which seems unlikely.
What you should be thinking about is expected total return of VBTLX. Next, and more critically, think about the dispersion of possible returns. There is a possibility of a crash followed by a flat market. This could bust your goals and portfolio. People almost always overestimate their ability to take risk and underestimate the impact of a crash.
You are also leveraging up your portfolio. This increases expected returns and volatility. Volatility decreases compounding growth. Depending on market factors you could end up with lower returns.
I am a modest proponent of leverage. I would tend to recommend that you get a conventional mortgage for your second home. While a fixed rate mortgage may carry a higher rate of interest than a floating rate margin loan it is fixed. Things tend to be more predictable and happen slower with a mortgage.
Can you offer a strong case on why a margin loan would be better? Very low cost basis is one argument. Short term cash flow issues are another.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Line of credit
How short is short? And how much does it matter if one aggressively pays it down along the way with the expectation of rising rates (so higher rates when "principal" is low -- is the amount borrowed still called "principal" for margin loans?)
Re: Line of credit
Not principal. Principal assumes a loan that was issued for a fixed amount. Margin loans operate more like credit cards. So "balance" would be a better word.harikaried wrote: ↑Fri Sep 17, 2021 5:34 pmHow short is short? And how much does it matter if one aggressively pays it down along the way with the expectation of rising rates (so higher rates when "principal" is low -- is the amount borrowed still called "principal" for margin loans?)
As for time frame, no one-size answer fits all. You need to think about opportunity costs. Plan A verse Plan B.
What is the cost of liquidating the funds? i.e., capital gains tax.
What is the risk of doing a margin loan?
What is the cost of other funding choices? A mortgage has heft up front fees. If I had a cash flow issue for a year it might make sense to sidestep those closing costs and do a margin loan instead.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Line of credit
We intend to use our margin facility to make cash offer on house or land until we sell current house. After which, we will either liquidate funds or refinance.
Rate is 1.3%.
Rate is 1.3%.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
Re: Line of credit
delete
Last edited by 126inc on Fri Sep 17, 2021 10:36 pm, edited 1 time in total.
Re: Line of credit
Because I understand that I can deduct all of the interest. Perhaps run the house thru an LLC? I don't know hence this post.alex_686 wrote: ↑Fri Sep 17, 2021 8:31 amYou can take cash out and do whatever you want with it. It is one of the advantages of a margin loan. Instant cash, no credit check, no questions. Blow it all in Vegas over a weekend. I have seen fortunes squandered this way.
This is a false line of reasoning. Most people get muddled when thinking about dividends. And about margin and "paying only the interest".jarjarM wrote: ↑Thu Sep 16, 2021 6:01 pm VBTLX sec yield is 1.28% right now, doesn't really made financial sense to pledge that and get a loan with interest rate higher than 1.28%. For pledged asset loan, the best I heard is around 1.2-1.3%, nothing there to gain financially, unless you somehow has lots of CG embedded in your VBTLX, which seems unlikely.
What you should be thinking about is expected total return of VBTLX. Next, and more critically, think about the dispersion of possible returns. There is a possibility of a crash followed by a flat market. This could bust your goals and portfolio. People almost always overestimate their ability to take risk and underestimate the impact of a crash.
You are also leveraging up your portfolio. This increases expected returns and volatility. Volatility decreases compounding growth. Depending on market factors you could end up with lower returns.
I am a modest proponent of leverage. I would tend to recommend that you get a conventional mortgage for your second home. While a fixed rate mortgage may carry a higher rate of interest than a floating rate margin loan it is fixed. Things tend to be more predictable and happen slower with a mortgage.
Can you offer a strong case on why a margin loan would be better? Very low cost basis is one argument. Short term cash flow issues are another.
If I do it thru a mortgage, I have to pay principal and the interest definition is capped.
What am I missing?
Re: Line of credit
Would you be kind enough to share who offers the 1.3% rate?RubyTuesday wrote: ↑Fri Sep 17, 2021 6:16 pm We intend to use our margin facility to make cash offer on house or land until we sell current house. After which, we will either liquidate funds or refinance.
Rate is 1.3%.
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Re: Line of credit
I’m using Schwab, based on other benefits like generous transfer bonus.RoadRat wrote: ↑Fri Sep 17, 2021 7:18 pmWould you be kind enough to share who offers the 1.3% rate?RubyTuesday wrote: ↑Fri Sep 17, 2021 6:16 pm We intend to use our margin facility to make cash offer on house or land until we sell current house. After which, we will either liquidate funds or refinance.
Rate is 1.3%.
Schwab is offering me margin at Fed funds rate (0.25%) + 1.05%, total 1.3%.
I believe others have gotten Schwab PAL (Pledged Asset Line) through Schwab Bank at SOFR (0%) + 1.26%. Total 1.26%. The PAL was going to take several weeks to get rate approved so they offered me attractive margin to get me to move.
These are obviously not fixed rate and would be risky in rising rate environment or if assets plunge or there’s some liquidity crisis. I’m considering only for short term.
These rates are basically trying to match Interactive Brokers which probably has the lowest margin rates.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
Re: Line of credit
I am a Schwab client. Is this rate available for all clients or is there a min. balance one should have in accounts with them? Thanks.
RubyTuesday wrote: ↑Sat Sep 18, 2021 7:46 amI’m using Schwab, based on other benefits like generous transfer bonus.RoadRat wrote: ↑Fri Sep 17, 2021 7:18 pmWould you be kind enough to share who offers the 1.3% rate?RubyTuesday wrote: ↑Fri Sep 17, 2021 6:16 pm We intend to use our margin facility to make cash offer on house or land until we sell current house. After which, we will either liquidate funds or refinance.
Rate is 1.3%.
Schwab is offering me margin at Fed funds rate (0.25%) + 1.05%, total 1.3%.
I believe others have gotten Schwab PAL (Pledged Asset Line) through Schwab Bank at SOFR (0%) + 1.26%. Total 1.26%. The PAL was going to take several weeks to get rate approved so they offered me attractive margin to get me to move.
These are obviously not fixed rate and would be risky in rising rate environment or if assets plunge or there’s some liquidity crisis. I’m considering only for short term.
These rates are basically trying to match Interactive Brokers which probably has the lowest margin rates.
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Re: Line of credit
As a new client, I don’t know the answer, but suspect they will match other firms offers or get close…invstar wrote: ↑Sat Sep 18, 2021 1:28 pm I am a Schwab client. Is this rate available for all clients or is there a min. balance one should have in accounts with them? Thanks.
RubyTuesday wrote: ↑Sat Sep 18, 2021 7:46 amI’m using Schwab, based on other benefits like generous transfer bonus.RoadRat wrote: ↑Fri Sep 17, 2021 7:18 pmWould you be kind enough to share who offers the 1.3% rate?RubyTuesday wrote: ↑Fri Sep 17, 2021 6:16 pm We intend to use our margin facility to make cash offer on house or land until we sell current house. After which, we will either liquidate funds or refinance.
Rate is 1.3%.
Schwab is offering me margin at Fed funds rate (0.25%) + 1.05%, total 1.3%.
I believe others have gotten Schwab PAL (Pledged Asset Line) through Schwab Bank at SOFR (0%) + 1.26%. Total 1.26%. The PAL was going to take several weeks to get rate approved so they offered me attractive margin to get me to move.
These are obviously not fixed rate and would be risky in rising rate environment or if assets plunge or there’s some liquidity crisis. I’m considering only for short term.
These rates are basically trying to match Interactive Brokers which probably has the lowest margin rates.
Contact a Schwab rep and tell them you want them to match IBs margin rate.
“Doing nothing is better than being busy doing nothing.” – Lao Tzu
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Re: Line of credit
In our case, we have an existing loan that will adjust next year following 5yr treasury. The initial rate 4 years ago was 1.76% + 3.30% = 5.06%, and if adjusted today 0.88 + 3.30% = 4.18%. It sounds like various margin loans are around Federal Funds Rate + 1-2%, so going back 4 years, that index would have been 0.91% requiring a spread of 4.15% to match our initial rate of 5.06%. If our loan had been based on the fed funds rate, the index did increase to 2.4% (so 6.55% assuming 4.15% spread) in 2019 as well as market drop in 2020 leading to potential margin call -- both probably would have been a bit stressful for this longer term loan. (At least we did TLH last year with those nearing 100% gains now.)
We have been aggressively making principal curtailments, so that's why I was asking about "short term" and the potential increasing rates in the context of rapidly decreasing balance. I suppose at best we would save about 3% interest if we switched to margin loan / PAL while taking on additional risk of call/cure, so does that point to just keeping our existing loan and aggressive payoff?
Re: Line of credit
As one data point one of our adult kids just got PAL at Schwab for a $250k draw supported by $500k brokerage account there with rate of 1.40 plus SOFR. So this is at 1.45%.
Re: Line of credit
I think this is my first "in the wild" sight of SOFR product. Interesting that they are using that. Not bad, just interesting.
For context, margin first was tied to "Prime" then "Libor".
Last edited by alex_686 on Mon Sep 20, 2021 6:29 pm, edited 1 time in total.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Line of credit
My schwab PAL is tied to LIBOR but a month or two ago they switched to SOFR for new accounts.
I see here the index and the rate spread has changed https://www.schwab.com/pledged-asset-line
but the index and rate has not changed on my own account view, which is nice, even tho they have the total right to do so.
also, when opening the account, i was near a cutoff on the table and was easily able to get one level better rate by asking for it.
I see here the index and the rate spread has changed https://www.schwab.com/pledged-asset-line
but the index and rate has not changed on my own account view, which is nice, even tho they have the total right to do so.
also, when opening the account, i was near a cutoff on the table and was easily able to get one level better rate by asking for it.
60-20-20 us-intl-bond
Re: Line of credit
Using IBKR margin rates as a competitive quote I was able to get a Schwab PAL (pledged asset line) 70% non-purpose lend rate of SOFR+1.25% or 1.3% APR for a minimum collateral of $700,000 plus they gave me a match of $1,800 on a $500,000 transfer in matching an ETrade promo. Good deal. It took about 3 weeks to set up. Free wires to access the funds as well.
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Re: Line of credit
Very bad and risky idea.
If you have enough assets and want to buy the vacation house, sell the assets to pay with cash.
If you can't afford it, don't make the same mistakes as Steve Martin. https://www.youtube.com/watch?v=R3ZJKN_5M44
If you have enough assets and want to buy the vacation house, sell the assets to pay with cash.
If you can't afford it, don't make the same mistakes as Steve Martin. https://www.youtube.com/watch?v=R3ZJKN_5M44
Re: Line of credit
Can you explain your reasoning please?protagonist wrote: ↑Mon Sep 20, 2021 8:40 pm Very bad and risky idea.
If you have enough assets and want to buy the vacation house, sell the assets to pay with cash.
If you can't afford it, don't make the same mistakes as Steve Martin. https://www.youtube.com/watch?v=R3ZJKN_5M44
My reasoning is explained in this thread, primarily the low interest that is(?) tax deductible
- cflannagan
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Re: Line of credit
Mortgages are okay, but borrowing against own assets is not?protagonist wrote: ↑Mon Sep 20, 2021 8:40 pm Very bad and risky idea.
If you have enough assets and want to buy the vacation house, sell the assets to pay with cash.
If you can't afford it, don't make the same mistakes as Steve Martin. https://www.youtube.com/watch?v=R3ZJKN_5M44
I've never understood why people keep saying it's a bad and risky idea, especially when one have no debts at all and have tons of assets. Also, borrowing rates at IBKR, Fidelity, etc seems to be lower than actual mortgage rates.
Re: Line of credit
I'd be willing to bet a significant majority of the people saying "don't do it; it's risky" have no idea and/or no experience with this product. If I've got $2 million in taxable, you can bet your butt I'm going to borrow half a mil at 1.6% instead of selling, missing out on dividend/further appreciation, and paying 15%+ taxes to boot.
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Re: Line of credit
Are you suggesting you're good borrowing up to 25% even though one could borrow up to 70% -- so roughly 35% of the maximum borrow amount? Or would you go up to say 35% / $700k or maybe higher?
Re: Line of credit
Depends on what investments underlie the margin loan or PAL, but I would generally like to stay under 50%. Life is no fun under pressure.harikaried wrote: ↑Tue Sep 21, 2021 9:20 amAre you suggesting you're good borrowing up to 25% even though one could borrow up to 70% -- so roughly 35% of the maximum borrow amount? Or would you go up to say 35% / $700k or maybe higher?
Re: Line of credit
If this is true and if we are being logically consistent here this implies that you are on margin and you should always be on margin.
And I don't mean you are using margin to buy something specific. You are saying that the best risk-adjusted portfolio is a leveraged portfolio. That since the expected Total Returns (dividends & appreciation) is greater than the margin rate you should always be leveraged.
This is a valid opinion. A aggressive opinion and one that I don't agree with, but a valid opinion.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Re: Line of credit
That is indeed my opinion and my portfolio reflects that. I am comfortable with some risk (comes from my trading days, so I understand what risk looks like when it shows up both announced and unannounced).alex_686 wrote: ↑Tue Sep 21, 2021 10:26 amIf this is true and if we are being logically consistent here this implies that you are on margin and you should always be on margin.
And I don't mean you are using margin to buy something specific. You are saying that the best risk-adjusted portfolio is a leveraged portfolio. That since the expected Total Returns (dividends & appreciation) is greater than the margin rate you should always be leveraged.
This is a valid opinion. A aggressive opinion and one that I don't agree with, but a valid opinion.
Re: Line of credit
This topic, as the OP, was about using margin to buy a vacation house. The margin loan would be for less than 25% of my total investment assets. The total of the margin loan is also covered entirely by VBTLX (bonds, not stocks). Hope that makes sense.8foot7 wrote: ↑Tue Sep 21, 2021 10:19 amDepends on what investments underlie the margin loan or PAL, but I would generally like to stay under 50%. Life is no fun under pressure.harikaried wrote: ↑Tue Sep 21, 2021 9:20 amAre you suggesting you're good borrowing up to 25% even though one could borrow up to 70% -- so roughly 35% of the maximum borrow amount? Or would you go up to say 35% / $700k or maybe higher?
My outstanding question is.... IS the interest deductible? My thinking is to borrow the money on margin backed by VBTLX holdings, buy the house in an LLC, deduct 100% of the interest.
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Re: Line of credit
+1, I would not sell stock and generate CG at 30+% (23.8% fed + 11% CA) just for vacation home. Of course, the assumption is that the asset utilized as collateral has expected return > interest rate of the loan.8foot7 wrote: ↑Tue Sep 21, 2021 9:08 am I'd be willing to bet a significant majority of the people saying "don't do it; it's risky" have no idea and/or no experience with this product. If I've got $2 million in taxable, you can bet your butt I'm going to borrow half a mil at 1.6% instead of selling, missing out on dividend/further appreciation, and paying 15%+ taxes to boot.
Re: Line of credit
I think there generally is a min. balance to get the favorable rate. Usually > $1mil total assets but I do think your financial consultant (account rep assigned to you) can work some magic if there's reasonable demonstration of additional assets moved over.
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Re: Line of credit
I'm not all that keen on mortgages either in most situations, but surely most people here would disagree with me on that and I don't want to open up that can of worms.cflannagan wrote: ↑Mon Sep 20, 2021 10:30 pmMortgages are okay, but borrowing against own assets is not?protagonist wrote: ↑Mon Sep 20, 2021 8:40 pm Very bad and risky idea.
If you have enough assets and want to buy the vacation house, sell the assets to pay with cash.
If you can't afford it, don't make the same mistakes as Steve Martin. https://www.youtube.com/watch?v=R3ZJKN_5M44
But there is a fundamental difference in that stocks are inherently very risky. To get a mortgage, in theory, you have to have solid assets to back up the loan. With margin borrowing you are putting up risky assets that may be gone tomorrow to secure the loan, in which case you can be screwed.
I admit I overstated the case. If low interest, tax deductible and a relatively small fraction of your assets, it is probably not all that risky, but as a general rule I think it is something to mostly be avoided. I don't believe it is a good idea to spend money that one does not have for luxury items like vacation homes. Maybe I am just out of sync with contemporary American consumer culture, but I do think it is something that our predecessors got right.
"The rise of the United States mortgage market occurred between 1949 and the turn of the 21 st century. In fact, the mortgage debt to income ratio rose from 20 to 73 percent during this time. In addition, mortgage debt to household assets ratio rose from 15 to 41 percent." imho, that cannot be a good thing (either in terms of personal security in the face of a severe economic downturn, or in driving real estate (and thus also rent) prices into the stratosphere as more and more people can spend way more money than they could dream of having on a home.
https://money.usnews.com/investing/inve ... rgin-loans
Re: Line of credit
it's mostly related to how large a margin loan you want and what you want to use it for. I asked for 2MM to give myself a bridge loan on a home purchase, a fried of mine asked for a larger loan and got it at 0.95%
Re: Line of credit
Hey there-
Would you mind sharing what the payback structure looks like for a loan of this structure ($250k draw on $500k)? Was it a fixed loan or line of credit? What’s the monthly payment? Is it interest only or is there a minimum + interest?
Any feedback would be much appreciated.
Thanks in advance!
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Re: Line of credit
How long does that rate last since it's a variable rate line of credit?skibummer wrote: ↑Mon Sep 20, 2021 8:35 pmUsing IBKR margin rates as a competitive quote I was able to get a Schwab PAL (pledged asset line) 70% non-purpose lend rate of SOFR+1.25% or 1.3% APR for a minimum collateral of $700,000 plus they gave me a match of $1,800 on a $500,000 transfer in matching an ETrade promo. Good deal. It took about 3 weeks to set up. Free wires to access the funds as well.
Re: Line of credit
These are a line of credit, though some of them require a minimum initial loan. Schwab says they require at least $70,000 for an initial minimum loan. Interactive Brokers has no minimum. There's no minimum monthly payment. If you don't pay then they add it to the amount owed. This flexibility on repayment is one of the attractions of this kind of leverage.