What Is Margin Interest and How Does It Work?

Margin interest is what your brokerage charges you for borrowing money against your account to buy securities. The rate is quoted annually but applied daily to whatever you owe, and most investors currently pay somewhere between 7.5% and 12% depending on how much they borrow and which firm they use. The rate is built from a base tied to broader interest rate benchmarks plus a markup that represents the broker’s profit, and the balance the interest is charged on can grow month by month as unpaid interest rolls into it.

What You’re Actually Borrowing

Opening a margin account gives you a line of credit from your broker that lets you buy more securities than your cash alone would cover. Federal Reserve Regulation T sets the baseline: you can borrow up to 50% of the purchase price of most stocks and eligible securities, meaning you have to put up at least half yourself.¹

The securities you buy, along with anything else already in the account, serve as collateral for the loan. If those holdings drop enough in value, the brokerage can sell them to cover what you owe, sometimes without asking first.² That direct claim against your portfolio is what separates margin from an unsecured personal loan.

Not every security qualifies. Stocks trading below $5 per share generally don’t, and companies that recently went public must have traded for at least six months before their shares become marginable.³ Non-eligible securities require 100% of their value in cash or other collateral, which defeats the purpose of borrowing.⁴

What Makes Up the Rate

Your margin rate has two parts: a base rate and a spread. The base rate is a benchmark the firm sets internally, and it moves with the broader interest rate environment. Many brokers anchor their base to the federal funds rate or the prime rate, both of which shift when the Federal Reserve adjusts monetary policy.⁵ As of January 2026, the federal funds rate sits at 3.5% to 3.75%.⁶

The spread is the markup the broker adds. It can be positive or negative depending on how much you borrow. At Fidelity, a client with less than $25,000 in margin debt pays the base rate plus 1.25%, while someone borrowing over $1 million gets the base rate minus 3.075%.⁷ The gap between those two clients runs over four percentage points annually, which is a meaningful cost difference on a large portfolio.

Some brokers still reference the prime rate as their base. Others have shifted toward the Secured Overnight Financing Rate. Compare the final effective rate across firms rather than getting hung up on which index they reference, because that final number is what actually hits your account.

How the Charge Is Calculated Each Day

Brokers calculate interest daily on whatever you owe. Take the annual rate, divide by the number of days in the year, and multiply by your debit balance that day. Most firms use a 360-day year rather than 365. That distinction isn’t just accounting trivia: dividing by 360 produces a slightly higher daily rate, so you pay a bit more over a year than the stated annual percentage might suggest.

Here’s the math on a $50,000 balance at 10%, using a 360-day year:

Daily rate: 10% ÷ 360 = 0.02778%
Daily charge: $50,000 × 0.0002778 = $13.89
Monthly cost over 30 days: about $416.67

Using a 365-day year, the daily charge would be $13.70 instead, saving roughly $6 over a month. Small on any single bill, but it adds up on large balances held for long periods. Your brokerage agreement will specify which convention the firm uses.

The balance the firm uses each day is typically the closing debit balance after all trades and settlements have cleared. Deposit cash or sell securities during the day and the debit drops, cutting that day’s charge. Buy more on margin mid-month and the daily charge rises from that point forward.

When Interest Posts and How It Compounds

The charge accrues daily but usually posts to your account once a month, typically on the last business day of the billing cycle.⁸ There’s no separate bill or payment. The accrued interest simply gets added to your margin debit balance.

That’s where compounding quietly works against you. Each month’s interest becomes part of the balance next month’s interest is calculated on. On a $100,000 margin loan at 10%, the first month’s interest is roughly $833. That amount rolls into the balance, so month two’s interest is calculated on $100,833. Over a year, this adds approximately $50 to $80 beyond what a simple interest calculation would suggest on a six-figure balance. Over several years of carrying margin debt, the effect becomes considerably more noticeable.

Some brokers offset this by sweeping any idle cash in your account against the margin balance, a practice called netting. With $20,000 in cash and $50,000 in margin debt, the firm charges interest only on the $30,000 difference.⁹ Not every firm does this automatically, so ask how yours handles cash. Leaving cash in a sweep account while carrying margin debt is essentially paying interest on money you already have.

What Determines the Rate You Pay

The biggest factor is how much you borrow. Brokers use tiered pricing where the rate drops as the loan grows. At Schwab, someone borrowing under $25,000 currently pays an effective rate of 11.825%, while a client with $250,000 or more pays 10.075%.⁸ Fidelity’s schedule is similar, with rates dropping as low as 7.50% for balances above $1 million.⁷

A few other things shape what you’ll actually pay:

Federal Reserve policy. When the Fed moves its target rate, broker base rates tend to follow. The current fed funds rate is already baked into the rates above, but future changes will shift them.⁶
Your relationship with the firm. Clients with large total assets or those in wealth management programs can often negotiate a lower spread. This isn’t advertised, but it happens regularly at full-service brokerages.
Account type. Portfolio margin accounts calculate margin requirements based on the overall risk of your combined positions rather than security by security, which can allow more borrowing power on the same collateral. That doesn’t directly lower the rate, but it may push you into a higher balance tier that carries a lower one.¹⁰
The broker itself. Discount and online firms that compete on cost may offer lower base rates than full-service firms, and shopping around before you borrow can save a full percentage point or more.

Is Margin Interest Tax Deductible

Margin interest is deductible as an investment interest expense on your federal return, with real limits. The deduction is only available if you itemize on Schedule A, so it does nothing if you take the standard deduction. You also file Form 4952 to calculate the allowable amount.¹¹

The deduction is capped at your net investment income for the year. Net investment income includes interest, ordinary dividends, short-term capital gains, and certain other investment income, minus investment expenses. If you paid $15,000 in margin interest but only earned $10,000 in net investment income, you can deduct $10,000 this year and carry the remaining $5,000 forward.¹²

Qualified dividends and long-term capital gains don’t count as investment income by default, because they’re taxed at lower rates. You can elect to include them, which raises your deductible limit, but the dividends and gains you include then lose their preferential rate and get taxed as ordinary income.¹¹ The trade-off only makes sense if your marginal ordinary income rate is low enough that the extra deduction outweighs the lost tax benefit on those dividends. Run the numbers both ways before electing, because revoking it later requires IRS consent.

The Risks Margin Interest Makes Worse

Interest on a margin loan runs in one direction only: against you. Your investments have to earn enough to cover the interest before you see a real return. At a 10% margin rate, a position funded entirely with margin debt needs to appreciate more than 10% annually just to break even after interest, and that’s before taxes and any fees.

That breakeven hurdle turns into something worse in a declining market. If your holdings lose value, you still owe the full loan amount plus all accrued interest. A 30% drop in a fully margined portfolio doesn’t just cut your equity by 30%. It cuts your equity by roughly 60%, because the loan balance stays fixed while the collateral shrinks. Add several months of interest on top and the math gets ugly.

Interest can also trigger a margin call on its own. If your equity is hovering near the maintenance threshold, a month’s worth of accrued interest rolling into your debit balance may be enough to push you under. When that happens, the broker can sell your securities to bring the account back into compliance without contacting you first and without letting you choose which positions get liquidated.² The SEC warns explicitly that you can lose more money than you originally invested in a margin account. Margin interest doesn’t just shrink returns when things go well; it accelerates losses and tightens the timeline when things go badly.

1
eCFR. 12 CFR 220.12 – Supplement: Margin Requirements
2
Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts
3
eCFR. 12 CFR 220.11 – Requirements for the List of Marginable OTC Stocks and the List of Foreign Margin Stocks
4
FINRA. 4210 – Margin Requirements
5
Board of Governors of the Federal Reserve System. What Is the Prime Rate, and Does the Federal Reserve Set the Prime Rate?
6
Board of Governors of the Federal Reserve System. FOMC Minutes, January 27-28, 2026
7
Fidelity Investments. Trading Commissions and Margin Rates
8
Charles Schwab. Margin Requirements and Interest Rates
9
Investor.gov. Investor Bulletin: Interested in Margin? Understand Interest
10
FINRA. Margin Regulation
11
Internal Revenue Service. Form 4952, Investment Interest Expense Deduction
12
Office of the Law Revision Counsel. 26 USC 163 – Interest