Term

Margin Loan

Published May 7, 2026

Definition

A margin loan is a loan from a brokerage to a client, secured by marginable securities held in the client's brokerage account. Federal Regulation T sets the initial margin requirement (typically 50% of marginable equity); brokerage maintenance requirements (often 25–35%) trigger margin calls when account equity falls below the threshold.

Margin loans are the cheapest unsecured-feeling credit available to most retail investors with sufficient assets — interest rates typically prime + 0.5% to prime + 3% depending on account size, often beating mortgage HELOC rates and almost always beating credit cards. The catch is the secured-by-securities collateral structure: when markets fall, the value of the collateral falls, and the brokerage can demand additional cash or securities (a margin call) or liquidate positions to restore the maintenance ratio.

The maintenance ratio mechanics are the source of nearly every margin-related disaster story. Suppose an account holds $100k of marginable equities supporting a $30k margin loan; account equity is $70k, against a 30% maintenance requirement on $100k of long market value, requiring $30k of equity. The cushion is $40k. A 30% market decline drops long market value to $70k; required equity at 30% becomes $21k against actual equity of $40k − $30k = $10k debit balance ... actually, equity = market value − loan = $70k − $30k = $40k. Wait let me recompute: required equity is 30% × $70k = $21k. Actual equity = $40k. Still in compliance. A 50% decline: market value $50k, equity $50k − $30k = $20k, required equity 30% × $50k = $15k. Still in compliance. A 65% decline: market value $35k, equity = $5k, required = $10.5k. Margin call: deposit $5.5k or face liquidation.

Two concentrated-risk multipliers make this worse in practice. First, single-stock margin requirements often start at 50% maintenance instead of 25%, dramatically tightening the cushion. Second, falling-knife liquidations sell into a thin market — the broker doesn't wait for a recovery, so realized losses often exceed the paper loss that triggered the call.

Formula

Account equity in a margin account

E = LMV − L

E: = account equity (the client's claim)
LMV: = long market value of marginable securities
L: = outstanding margin loan including accrued interest

Margin call triggers when E falls below the maintenance requirement on LMV (typically 25–35% for diversified equities, 50%+ for concentrated single-stock).

Why this matters for synthetic data

Synthetic households with margin loans need full mechanics: outstanding balance, current interest rate (with prime-rate sensitivity), collateral marketable equity, current LTV ratio, distance to maintenance call. A meaningful subset should be in stress: pre-existing margin call, near-cushion accounts that respond to a market shock, concentrated-position margin where a single security drives the call. These edge cases drive cash-management algorithms, margin-call alerting features, and pledged-asset-line risk models.

Common pitfalls

Computing maintenance against initial loan amount instead of current LTV — the call depends on current market value of collateral, not historical.
Letting concentrated positions earn the same maintenance multiplier as diversified equity — single-stock margin requirements should be 50% by default.
Forgetting that interest accrues daily; an 'unpaid' margin loan can balloon meaningfully over a multi-month down market without explicit payments.
Not modeling the liquidation cascade — broker liquidations often hit at the worst time and at unfavorable prices, deepening the realized loss.

Examples

Margin-call mechanics

Account with mixed concentration shocks the cushion.

Initial state:
  Long market value:      $400,000
  Margin loan:            $150,000
  Account equity:         $250,000
  Maintenance req (25%):  $100,000
  Cushion:                $150,000

After 35% market decline:
  Long market value:      $260,000
  Margin loan:            $150,000  (unchanged + accrued interest)
  Account equity:         $110,000
  Maintenance req (25%):   $65,000
  Cushion:                 $45,000  → still in compliance

After 50% decline:
  Long market value:      $200,000
  Account equity:          $50,000
  Maintenance req (25%):   $50,000
  Cushion:                      $0  → margin call

Frequently asked questions

Can I deduct margin-loan interest on my taxes?+

Investment-interest expense is deductible up to the amount of net investment income, on Schedule A as an itemized deduction. Margin interest used for non-investment purposes (e.g., a home down payment funded by a margin loan) is not deductible. The trace of how the borrowed proceeds were used matters; documentation is the taxpayer's burden.

Are pledged-asset lines (PALs) different from margin loans?+

Yes — PALs are separately-titled credit lines secured by a brokerage account but typically used for non-securities purposes (real estate, business). PALs usually carry lower rates than margin (sometimes 50–100 bps), more conservative LTV requirements (50–60% vs. 70%+ for margin), and cannot be used to buy more securities. The collateral haircut on a PAL is more punitive than margin precisely because the collateral can't be replenished from loan proceeds.