7 Ways to Finance Luxury Assets

When purchasing a luxury asset such as blue-chip art, a classic car, a new boat or a high-end RV, it can make sense in some cases to leverage financing over cash. Strategic borrowing helps you retain cash for other opportunities and access liquidity without triggering capital gains taxes.

There are a variety of luxury asset financing options available, from securities-based lines of credit to collateralized term loans. Learning more about each option can help you identify the best borrowing strategy for your goals.

Securities-backed line of credit

Interest rates for a securities-backed line of credit, or SBLOC, are typically lower than for other lending instruments—especially personal loans or credit cards—making them a popular funding source for luxury assets.

With an SBLOC, the lender becomes a lienholder on your securities, providing you with a revolving line of credit in return. SBLOCs are considered non-purpose loans, which means you can use them to fund almost any purchase except for buying other securities. Plus, because you're leveraging the value of the securities without having to liquidate them, you won't be subject to capital gains taxes.

While the interest rate for SBLOCs is typically variable, some firms can convert part of an SBLOC to a fixed-rate term loan.

"We can term out a portion [of your SBLOC] over 5, 10 or 15 years, allowing you to lock in a fixed rate," says Michael Shaw, Director, Regional Private Banking at First Citizens Wealth Management. "You'll still have the remaining balance available for your use, and as you pay down the balance on the term loan portion, it's restored back into the line."

SBLOCs may be an attractive borrowing option for some investors. However, it's a good idea to consult with a private banker or portfolio strategist to fully understand the possible risks. For example, if the value of your investments declines, the lender may ask you to pledge additional securities or repay a portion of the loan to bring the ratio back within acceptable limits. If you're unable to meet these requirements, the lender may need to liquidate your securities and retain the cash to satisfy the debt.

To reduce the risk of this occurring, borrowers will want to ensure the SBLOC is properly collateralized to allow a cushion during market downturns.

Home equity line of credit

If you have a sizable amount of home equity, a home equity line of credit, or HELOC, may be a cost-effective option for financing luxury assets. With a HELOC, you'll receive access to a line of credit that's backed by your home's equity.

While HELOCs are typically far cheaper than credit cards, they still have floating interest rates, meaning you could encounter higher borrowing costs as the rate fluctuates based on the market.

"With an SBLOC, our collateral positions are easy to set up—you don't have all the appraisals and closing costs involved in setting up a home equity line. The interest rate may be a little bit lower, and the flexibility is probably going to be a little bit greater," Shaw says. "However, if the market is declining, it may be a better time to look at a home equity line."

Collateralized term loan

With a collateralized term loan, the asset you purchase will be used to secure the loan—much like a traditional auto loan.

While interest rates on asset-backed term loans are often lower than those on unsecured loans, they can vary greatly. Also, be aware that lenders may charge an administrative fee for setting up and managing asset-backed term loans.

Dealer or manufacturer financing

Dealers and manufacturers of boats, RVs and planes often offer customers loans directly or through third parties. Dealer-based financing is often easier to qualify for and may give borrowers access to exclusive deals and promotions, but these loans typically have higher interest rates than loans from a bank.

Also, be wary of extended terms. "Long terms may not always be in your best interest, especially for a depreciating asset," Shaw explains.

Leasing

Leasing won't allow you to build equity. However, it may come with other benefits, such as flexibility. For example, leasing a luxury car may allow you to upgrade more frequently. Additionally, monthly payments for a leased asset may be lower than payments for a collateralized term loan.

Auto leases typically come with some limitations on mileage, along with steep fees for excess wear and tear. While boat leases may sometimes be available, many tend to have short terms—often for a single season. With personal aircraft, a limited supply and a robust secondary market may make ownership—or even fractional ownership—more attractive than leasing.

Other borrowing options

Two additional financing options you may want to consider are credit cards and personal purpose loans. If your credit card has a low introductory APR and you're planning on reselling the asset for a profit—or if you earn cash back or points on your purchases—the benefits of using a credit card for a luxury purchase may outweigh the potential drawbacks.

However, with credit card rates at an all-time high—the average interest rate recently exceeded 20% for the first time in almost 30 years, according to Federal Reserve data—personal purpose loans may offer slightly more attractive rates. However, these interest rates will still typically be higher than other financial instruments, such as HELOCs and SBLOCs.

Which financing option is right for you?

When financing the purchase of a luxury asset, evaluate your goals and the type of asset you're hoping to finance so you can determine the most effective borrowing strategy.

Some things to ask yourself beforehand include:

• How difficult it will be for lenders to determine the asset's value
• Whether it's necessary to get a professional appraisal or authentication
• If the purchase is a short- or long-term investment
• If the asset you're financing will serve as collateral for the loan
• Whether another asset—such as securities or home equity—could serve as collateral

These are just a few issues that may impact your financing strategy. A private banker or wealth management consultant can help you evaluate these options and identify a customized lending solution based on your unique cash flow needs.

"We have access to a number of different financing structures," Shaw explains. "And as bankers, we can look at everything in totality and make a recommendation that's based on a full understanding of your resources."