A margin loan is money you borrow from your brokerage firm, using the securities already in your investment account as collateral. Federal rules let you borrow up to 50% of a stock’s purchase price, which effectively doubles your buying power compared with paying entirely in cash. That leverage runs both directions: it magnifies gains when prices rise and deepens losses when they fall, and your broker can sell your holdings without asking if the account value drops too far.
How a Margin Loan Works
In a cash brokerage account, you can only buy securities with money you’ve deposited. Put in $5,000, and $5,000 is the most stock you can buy. A margin account changes that math. With the same $5,000, you could purchase up to $10,000 of stock and borrow the other $5,000 from the broker. That borrowed portion is the margin loan.
The securities you own act as collateral, giving the broker a legal claim to sell them if you can’t repay or if their value falls too low. Your loan balance moves up and down as you borrow more, repay, or accrue interest. Meanwhile, the market value of the collateral shifts every trading day. The interest rate, the collateral thresholds, and the broker’s right to liquidate positions are all set out in a margin agreement you sign when you open the account.
Two thresholds govern how much you can borrow and how much equity you must keep. When you first buy on margin, the Federal Reserve’s Regulation T requires you to put up at least 50% of the purchase price with your own money.1eCFR. 12 CFR 220.12 – Supplement: Margin Requirements After the purchase, FINRA Rule 4210 requires you to maintain equity of at least 25% of the current market value of your long positions.2Financial Industry Regulatory Authority. FINRA Rule 4210 – Margin Requirements Most brokerages set their own “house” maintenance requirements above that floor, often 30% or 35%, and those are the numbers that actually trigger margin calls at most firms.
Your account equity is the market value of your securities minus the loan balance. If that equity slips below the maintenance threshold, the broker can act.
What a Margin Loan Costs
Margin loans carry variable interest rates that move with market conditions. Brokers usually peg their rates to a benchmark such as the federal funds rate or their own base rate, then add a spread. As of early 2026, rates at major U.S. brokerages run from roughly 4.5% on large balances to over 11% on smaller ones.3Interactive Brokers. US Margin Loan Rates Comparison
Almost every broker uses a tiered structure: the more you borrow, the lower the rate. A $25,000 balance might be charged 11% at a given firm while a $1.5 million balance at the same firm pays roughly half that. Bigger loans come with lower rates and bigger risk.
Interest compounds and is charged to the account monthly, which adds to the loan balance. Many investors miss this. The interest charge itself pushes your equity ratio down, moving you closer to a margin call even when your holdings haven’t lost value. Because the rate is variable, a rising-rate environment increases your borrowing cost with no warning and can erode returns faster than expected.
Margin Calls and Forced Liquidation
A margin call happens when your equity falls below the maintenance requirement. The broker demands enough cash or securities to bring the account back above the threshold.
Here is the part that surprises most investors: your broker is not legally required to notify you before selling your securities. FINRA is explicit. Firms don’t have to issue a margin call before liquidating. They can sell enough to pay off the entire loan rather than just meet the call amount. And they don’t have to let you choose which positions get sold.4Financial Industry Regulatory Authority. Know What Triggers a Margin Call
The broker’s only priority during a liquidation is protecting the firm’s capital. Your tax situation, your holding periods, and your reasons for owning a particular stock don’t enter the calculation. Forced sales often lock in losses at the worst possible moment, since margin calls cluster during sharp market declines. The broker can sell positions even if you have pending limit orders on them.
Losses That Can Exceed Your Investment
The most important thing to understand about a margin loan is that you can lose more than you originally put in. If your securities drop far enough, the broker liquidates them, and the sale proceeds don’t cover the loan balance, you owe the difference out of pocket. That is fundamentally different from buying stock with cash, where the most you can lose is what you paid.
Several other risks stack on top:
- Forced liquidation at the worst time. Margin calls hit during steep declines, forcing sales at low prices. You don’t pick which positions go, which can trigger unplanned taxable gains or lock in losses on holdings you meant to keep.
- Interest erosion. At rates near or above 10% for smaller balances, your investments have to outperform that cost just to break even. In flat or moderately positive markets, interest charges can quietly consume your returns.
- Compounding in reverse. Monthly interest raises your loan balance, which lowers your equity percentage, which brings you closer to a margin call, even if the portfolio’s market value hasn’t changed.
- Rate increases. Because margin rates are variable, the cost your loan carried when you opened it has no bearing on what it costs six months later.
Not Every Security Qualifies as Collateral
When you open a margin account, you sign an agreement acknowledging the risks, including the broker’s right to liquidate without notice. Not every security in the account counts toward your margin collateral. Penny stocks, newly issued shares shortly after an IPO, and certain other thinly traded securities are generally excluded. The broker decides which of your holdings qualify.
Tax Treatment of Margin Interest
Margin interest is treated as investment interest expense, and you can deduct it on your federal return, but only up to the amount of your net investment income for the year.5Office of the Law Revision Counsel. 26 USC 163 – Interest Net investment income generally includes interest, ordinary dividends, and certain royalties, minus related expenses. Qualified dividends and long-term capital gains don’t count toward that income total unless you elect to include them, and making that election means giving up the lower capital gains tax rates on the amount included.6Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
If your margin interest exceeds your net investment income in a given year, the excess carries forward indefinitely. You claim the deduction on IRS Form 4952. One limitation to know: you cannot deduct margin interest on funds used to buy tax-exempt securities such as municipal bonds.7Internal Revenue Service. Form 4952 – Investment Interest Expense Deduction
Margin Loans Versus Securities-Based Lines of Credit
People sometimes confuse margin loans with securities-based lines of credit. They are not the same product. A margin loan lives inside your brokerage account and can only be used to buy more securities. A securities-based line of credit is a separate lending facility secured by your portfolio that can be used for almost anything except buying securities: paying taxes, funding a home purchase, covering business expenses.
The practical differences matter. Securities-based lines of credit are typically structured as standalone facilities apart from the brokerage account, and some lenders give you more time to address a collateral shortfall before forcing a sale. Margin loans sit inside the brokerage account with real-time collateral monitoring and the potential for immediate liquidation. If you want to borrow against your portfolio for something other than buying stock, a securities-based line of credit is the product built for that purpose, and conflating the two can create regulatory problems, since Regulation T prohibits using margin loan proceeds for non-securities purposes.