Credit Lombard is a financing solution offered by banks that allows a loan to be obtained against collateral in the form of securities, mutual funds, life insurance policies or sight deposits. This type of loan can be a useful solution for those who need immediate liquidity but do not want to disinvest from their investment portfolio.

How does Credit Lombard work?

Credit Lombard works like a secured loan: the bank grants a loan against collateral in the form of securities or other financial instruments. The maximum amount of the loan depends on the type of securities to be used as collateral as well as their liquidity and volatility. In principle, a loan can be obtained for an amount equal to the market value of the collateral provided, reduced by the margin required by the bank.

What are the advantages of Credit Lombard?

Credit Lombard can be an attractive option for those wishing to finance a purchase without having to draw on their investment portfolio. In this way, one can avoid selling securities or other financial instruments that may have potential for future appreciation. In addition, Credit Lombard can offer lower interest rates than other forms of credit, such as personal loans or credit card financing.

How can Credit Lombard be used?

Credit Lombard can be used to finance the purchase of consumer goods, such as a kitchen, a car or a holiday. In this case, the retail investor can provide securities or other financial instruments he already has in his portfolio as collateral. The main advantage of this solution is that one can avoid selling investments to finance the purchase, and one can continue to benefit from the future appreciation potential of securities.

For example, suppose a retail investor has shares in his portfolio worth EUR 10,000 and wants to buy a kitchen worth EUR 5,000. In this case, the investor can use Credit Lombard to obtain a loan equal to the value of the securities provided as collateral, reduced by the margin required by the bank. In this case, the investor can obtain a loan of approximately EUR 8,000 (80% of the value of the securities provided as collateral) and use it to finance the purchase of the kitchen. In this way, the investor does not have to sell the shares to obtain liquidity, and can continue to benefit from the future appreciation potential of the securities.

Conclusions

Credit Lombard can be an attractive solution for those who want to obtain a loan without having to sell their investments. However, it is important to bear in mind that Credit Lombard may be subject to risks. For example, if the prices of the assets used as collateral for the loan fall dramatically, the lender might ask the investor to increase the amount of collateral or sell part of the asset to repay the loan.

Moreover, Credit Lombard may not be suitable for all investors. It is important to consider the costs of the loan and carefully assess whether the purchase of an asset is really necessary and whether Credit Lombard is the best solution for obtaining the necessary funds.

In any case, Credit Lombard can be an attractive option for retail investors who need temporary financing for major purchases and do not want to draw on their investment portfolios. With proper risk and cost assessment, Credit Lombard could be a convenient and flexible solution for financing their purchases.