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Lending a hand.

September 12, 2011
Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management

If you need to borrow money to, say, buy a car or pay an unexpected tax bill, your first thought might be to take out an auto loan, use a credit card or apply for an unsecured personal bank loan. But don't overlook these other sources of borrowed money.

Your portfolio. Some investors hold their securities in a margin account, so they can borrow against the account's value to purchase more investments. But you could also take out a "nonpurpose" loan, borrowing against your financial assets for some other reason, like paying for a home repair or a big medical bill.

Be warned: This borrowing will magnify your losses if your account loses value. Indeed, in a bear market, your account's value could drop sharply. That might lead to a margin call--which means you will have to deposit additional cash or securities and, if you don't, you could be compelled to sell stocks.

Your home. Let's say you need to borrow $15,000 for your child's next tuition payment. You might take out a home-equity loan for that amount. These loans often charge a fixed interest rate, which should be lower than the rate on a credit card or an unsecured personal loan. Alternatively, if you aren't sure how much you need to borrow or when you'll need the loan, you might set up a home-equity line of credit and only draw on it as you need additional money.

Repaying such loans will, of course, increase your monthly expenses. That could create additional financial strain, especially if you see a drop in your household income. Your 401(k) plan. If your employer allows it, you could borrow from your 401(k) retirement-savings plan. Keep in mind that you may miss out on investment gains while the borrowed money is out of your account. In addition, if you leave your job and you can't immediately repay your 401(k) loan, it will be considered a distribution, triggering income taxes and probably a 10% tax penalty.

Your life insurance. If you have a cash-value life insurance policy, you might consider borrowing against part of the cash value. Policy loans don't have to be repaid. But repayment is usually advisable, because the loan--plus the interest charged--will reduce your policy's cash value and its death benefit. In addition, if you don't repay the loan plus interest, your policy could potentially lapse.

INVESTMENT AND INSURANCE PRODUCTS: • NOT FDIC INSURED • NOT A BANK DEPOSIT • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NO BANK GUARANTEE • MAY LOSE VALUE

Terms and conditions of accounts, products, programs and services are subject to change.

The information provided is solely for informational purposes. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.

Borrowing against securities may not be suitable for everyone. If the value of the securities should decline below a minimum level, you may be subject to a collateral call without specific advance notice, requiring you to deposit additional cash and/or securities. If you cannot do so, all or a portion of your collateral could be liquidated, and a potentially taxable event could result. You are not entitled to choose which securities are sold or any extension of time to meet a collateral call. A concentrated portfolio holding a single or a few securities may be subject to greater risk of a collateral call than a diversified portfolio; a diversified portfolio will tend to be less subject to a sharp decline resulting from the negative performance of a single security. Availability, qualifications, and other restrictions may vary by state. Ask your Financial Advisor for details.

A Home Equity Line of Credit is a form of revolving credit in which your home serves as collateral. Home equity plans typically involve variable interest rates rather than fixed rates. Before entering into a plan, consider how you will pay back any money you might borrow. Some plans set minimum payments that cover a portion of the principal (the amount you borrow) plus accrued interest. But, unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term.

Costs to obtain a home equity line. Many of the costs in setting up a home equity line are similar to those you pay when buying a home. For example:

  • a fee for a property appraisal, which estimates the value of your home;
  • an application fee, which may not be refundable if you are turned down for credit;
  • up-front charges, such as one or more points (one point equals one percent of the credit limit);
  • other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance as well as taxes;
  • certain fees during the plan; for example, some plans impose yearly membership or maintenance fees;
  • you also may be charged a transaction fee every time you draw on the credit line.

Since life insurance is medically underwritten, you should not cancel your current policy until your new policy is in force. A change to your current policy may incur charges, fees and costs. A new policy will require a medical exam. Surrender charges may be imposed and the period of time for which the surrender charges apply may increase with a new policy. You should consult with your own tax advisors regarding your potential tax liability on surrenders.

© 2011 Citigroup Inc. Citi Personal Wealth Management is a business of Citigroup Inc., which offers investment products through Citigroup Global Markets Inc. ("CGMI"), member SIPC. Insurance products are offered through Citigroup Life Agency LLC ("CLA"). In California, CLA does business as Citigroup Life Insurance Agency, LLC (license number 0G56746). CGMI, CLA and Citibank, N.A. are affiliated companies under the common control of Citigroup Inc. Citi and Citi with Arc Design are registered service marks of Citigroup Inc. or its affiliates.

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