Rich people live on loans by borrowing against investments they would rather not sell, paying the interest from other cash, refinancing when the loan comes due and, in the end, letting the bank be repaid from the assets they leave behind. What if you could spend a million dollars and keep the investments that made you rich? Some people borrow against what they own so they do not have to sell it, make payments for years and still owe the bank the full million.
How they handle the day the bank wants its money back depends on how much they own, what produces cash and what happens to their investments along the way. This article follows the arrangement from the first loan to the last settlement, using the illustrative numbers from the video. Tax points follow U.S. rules.
Watch the full video here, or skip to the breakdown below.
The loan lifecycle at a glance
- How rich do you need to be to borrow against your investments? (0:23)
- Where does the interest money come from? (1:51)
- Refinancing the loan (4:52)
- What can make the bank ask for its money now? (6:27)
- Who pays when the person dies? (8:26)
1. How rich do you need to be to borrow against your investments?
What interests a bank is the investments it could sell if you do not repay. Shares in widely traded companies are one example, because their price is visible and they can usually be sold quickly. That does not mean it lends the full value. If you own $200,000 in investments, a bank might offer a much smaller credit line, depending on which investments you own and its own rules, and some banks require at least $100,000 in eligible investments just to open this kind of account.
Even then, the loan will not cover your life. Borrow $50,000 and spend $50,000 a year, and you have bought one year of spending while still owing the $50,000. Compare someone who owns ten million dollars in shares and spends $200,000 a year. If a bank lends them a million against those shares, they can draw money for several years and keep what they own. The shares give the bank a reason to lend, but spending decides how long the cash lasts.
That is why there is no magic number where this becomes free money. The more someone owns relative to what they borrow and spend, the more room they have to manage the loan. The bank will also care whether the ten million is spread across investments or tied up in one company whose shares could fall sharply.
Someone rich enough to get the loan still has to pay for it.
2. Where does the interest money come from?
Suppose that person borrows a million at an illustrative 6% interest rate. The interest bill is $60,000 a year, or roughly $5,000 a month. They may be allowed to pay only the interest and leave the million-dollar balance untouched. Owning ten million in shares does not automatically put $5,000 in their account every month, so the money has to come from somewhere.
Some shares pay dividends, which are cash payments certain companies make to shareholders. Say those payments bring $100,000 a year after tax. That covers the interest with $40,000 left over, which could even reduce the debt. Interest-only terms leave that choice open and do not forbid repayment. But many shares pay little or nothing in cash, so the price can rise all year, making the person richer on paper, while the interest bill still arrives on Friday.
They might pay it from a business, rent from a property or savings they already have. They might sell a few shares, set aside some borrowed money to cover payments (which leaves less to spend) or ask the bank for more money to pay the interest, if the loan allows it. That last option is costly because borrowing to pay interest raises the balance. Someone spending $200,000 a year cannot keep a million-dollar loan unchanged forever unless other cash pays for part of that lifestyle, whether a business, investment income or a plan to sell something later.
For some, the later sale is the whole reason to borrow. Say someone has agreed to sell a property but the buyer will not pay for three months. They borrow against their shares for a large expense today and repay when the sale closes, paying three months of interest to solve a three-month cash problem. Should the buyer pull out, they need a different plan. That is a very different arrangement from spending against your shares for thirty years.
A rising share price pays no interest bill on its own.
3. Refinancing the loan
Suppose the loan comes due and the borrower does not want to sell their investments. They can ask the bank to extend it or ask another bank for a new one. Say the second bank approves a million dollars: that money pays off the first bank, and the person now owes the second bank under a new agreement. In cash terms that is refinancing: the investments stay in place and the debt moves to another agreement.
If the ten million in shares has grown to fifteen million, a bank sees more investments behind the same million-dollar debt. It might even lend more, though that is a new decision and a bigger loan means more to repay. With the shares worth six million instead, the person still has assets far above the debt, so a replacement loan may be possible. But the bank may lend less, charge more or ask for different investments to back it. The old deal does not entitle anyone to the same deal again.
There is a reason to refinance even when you have enough shares to sell. Suppose a block bought for $100,000 is now worth a million. Under U.S. tax rules, selling the lot can create a $900,000 gain, which may be taxable. Borrowing against the shares gives access to cash without selling today. The person may decide interest is worth paying to keep the investment and delay the sale, and if interest gets too expensive they can change their mind and sell some shares to reduce the loan. There is no promise the investment will grow enough to justify the cost.
Everything so far depends on the bank being willing to continue the arrangement.
4. What can make the bank ask for its money now?
Some loans have a scheduled end date. Others work more like a credit line, letting you take money, repay it and borrow again within a limit. Certain credit lines also allow the lender to demand repayment before you expected to pay it back. Schwab’s published terms, for example, say its bank can demand some or all of the balance at any time, which matters if you have already spent the cash.
Interest rates can change too. On the million-dollar loan, moving from 6% to 9% adds $30,000 to the yearly interest bill, and someone whose income covered the old bill might decide the new one is not worth it.
The more urgent problem comes when the investments behind the loan fall. Take a separate example where someone borrows $800,000 against shares worth two million, and the agreement says the loan must stay at or below half the value of the shares. The shares fall to $1.2 million. Only $600,000 of debt is now allowed against them, yet the person still owes $800,000. The lender can ask for $200,000 in cash or more investments, and if they cannot provide either, it may sell some of the shares backing the loan.
That sale shrinks what is left to back the debt. In this simplified example it takes a $400,000 sale to bring the loan within the half-value rule, leaving $400,000 of debt against $800,000 of shares. The person can believe the shares will recover next year, but the bank may give only days to act. Someone who borrowed a million against ten million started with far more room for prices to fall, which is a big part of how people keep this going for a long time.
It still does not mean the bank has given them money it can never ask to have back.
5. Who pays when the person dies?
This answer follows U.S. rules, because inheritance rules vary from country to country. Money and property someone leaves behind, called their estate, can be used to settle what they owe. The person handling the estate can use its cash or sell assets to pay the bank. Children generally do not have to pay a parent’s loan from their own savings just because they are the children, although shared debts and other exceptions exist. A claim to be paid still belongs to the lender from the assets backing its loan.
One American tax rule can change the cost of selling investments after death. Suppose someone paid a million dollars for shares worth ten million when they die. For many inherited investments, the starting point for calculating a taxable gain becomes their market value at death. Under the usual rule, that starting value is ten million, so selling the shares for ten million creates no gain above it.
Now say the estate owes the bank a million dollars. With no change in value, it could sell a million dollars’ worth of shares to settle the debt with no capital gain on that portion under these assumptions. The remaining shares are worth nine million before other bills, expenses and any other taxes. The family has still given up a million dollars of investments to pay the bank, but the tax treatment can make that sale cheaper than it would have been during the person’s life. Estate taxes and different asset types can change the result, and any gain after death can be taxable when the shares are sold.
The lender got its money, and the cost to the family was the interest already paid and the part of the inheritance used to settle the bill.
The basic sequence
Someone borrowed while alive, paid for the loan as they went and kept the investments they wanted to hold. Later, the remaining debt was paid with assets they left behind. It works only while the bank keeps agreeing, the investments hold their value and the interest gets paid from somewhere real.
FAQ
Why do rich people borrow against investments instead of selling them?
Borrowing gives them cash while they keep investments they want to hold. In the video’s example, selling shares bought for $100,000 and now worth a million could create a $900,000 gain that may be taxable.
How do rich people pay the interest on these loans?
From dividends, a business, rental income or savings, by selling a few shares, or sometimes by borrowing more. Borrowing to pay interest is costly because it raises the balance.
What happens when a securities-based loan comes due?
The borrower can ask the bank to extend it or refinance with another bank. A new lender may offer less, charge more or want different investments as backing.
What is the risk of borrowing against shares?
If the shares fall, the bank can ask for cash or more investments, and may sell shares if you cannot provide them. Some credit lines also let the bank demand repayment at any time.
Who repays the loan when the borrower dies?
Under U.S. rules, the estate settles the debt using its cash or by selling assets. Children generally do not have to pay a parent’s loan from their own savings.
Keep reading
- Some People Are Discovering They Get Work From Home & They’ll Never Go Back
- 15 Investments Rich People Make The Poor Know Nothing About
- They Got Rich but Gave All The Money Away
