Lombard loan: how it works and when to use it

If we take the most canonical definition, the Lombard loan is one in which it is used a financial asset as collateral to obtain liquidity. It's simple, even if it may sound complicated. When a bank customer applies for a mortgage, the collateral is usually the property itself. But not only that, sometimes many people need to obtain liquidity in order to make the down payment on that loan and even dispose of their financial assets.

With a Lombard loan, you can request financing from the bank based on the amount you have invested, using your portfolio as collateral. The most positive aspect, without a doubt, is that there's no need to sell the assets, so they continue to generate returns.

In the case of BBVA in Switzerland, Private Banking clients have access to different financing options adapted to your financial needs. In addition, the institution offers lines of credit, traditional loans, bank guarantees, and credit cards, allowing investors to access flexible solutions without having to part with their financial assets.

For example, an entrepreneur needs €100,000 to start their new business. They could remortgage their home or have to sell part of their investment portfolio, valued at €200,000. However, with the Lombard loan, he uses the portfolio as collateral, without having to sell the assets, which continue to generate returns.

An entrepreneur needs 100,000 euros to start their new business. They could remortgage their home or have to sell part of their investment portfolio, valued at €200,000. However, with Lombard loans, the portfolio is used as collateral, without having to sell the assets, which continue to generate returns.

The mechanism is not complicated, but it is only possible for those who own financial assets. When you have an investment portfolio, you can apply to the institution for this type of loan. In exchange, the customer receives an amount that is related to the value and type of the asset. Having €100,000 in stocks is not the same as having €100,000 in bonds.

While using their portfolio as collateral, customers can continue to generate returns on their investments and even carry out trading operations in the portfolio, although there may be certain limitations. Finally, as for repayment, it works like any other type of loan, with a monthly installment including interest.

Once you understand what the Lombard loan is and how it works, you need to understand other key aspects to know when and how to use it. For example, the amount that the entity can lend as financing is not equivalent to the total value of the portfolio, but to a percentage of this. Furthermore, this percentage will be higher or lower depending on the composition of the portfolio.

A safer portfolio, with fixed income, bonds, or gold, may receive a higher percentage than a portfolio composed of equities, due to the volatility and risk associated with the latter type of asset.

In addition, the customer should also be aware that if the value of the guarantee increases due to market forces, they can request additional financing if this is stipulated in the contract. At the same time, you can also exchange one collateral for another and move the portfolio within the agreed-upon timeframe.

The advantages of this type of financing are many. Above all, it is noteworthy that it is not necessary to sell part of the financial assets in order to have liquidity. Something that allows investors to continue generating profitability, money, and access to financing.

Definitely, the opportunity cost of money is another very important aspect. This means that if you sell off financial assets to gain liquidity, you're also giving up profitability and potential gains. Therefore, if you have €100,000 invested and, instead of selling it to gain cash, you leave it invested while you take out a Lombard loan, those €100,000 will continue to grow over the years.

In addition to the above, it is important to note that while a pledge immobilizes assets until the debt is repaid, a Lombard loan allows them to remain in circulation within the portfolio, with the capacity to generate returns and even with a certain margin for maneuver.

As for the risks, if you are unable to repay the loan, the lender will keep the collateral. But that can also be seen as an advantage, because you would not lose a house (for example), but rather part or all of your portfolio.

At the same time, there are also limitations in the portfolio's operations. The contract may stipulate certain restrictions that prevent you from freely operating your investments. For example, if you have 100% fixed-income, it will be difficult to convert it to 100% variable-income, but it depends on the conditions established in the contract.

A Lombard loan makes a lot of sense when the interest you pay is lower than the return on your portfolio, because you will be earning money and paying off the loan at the same time. It also makes sense if you have a well-configured portfolio for the long term and you won't need to sell your financial assets.

When it makes the least sense is, above all, if your financial situation is not stable and you might have to sell assets in order to meet payments. But if you don't need to sell them during the term of the loan, it's a great option. In short, unlike other mechanisms such as pledging, which block the portfolio, Lombard loans are particularly useful for those who wish to keep their investments active while accessing immediate liquidity.

In Lombard loans, liquid financial assets such as investment portfolios (stocks, funds, bonds) are usually pledged as collateral, and in many cases it is permitted to continue trading with them partially, albeit with certain restrictions. In general, any asset that can be pledged as collateral can be used as collateral for pledged loans, such as time deposits, savings insurance, promissory notes, or other assets that are not necessarily financial or listed.