Why Someone Might Borrow Money Instead of Selling an Investment

What Selling an Investment Actually Gives Up

Selling an investment does more than convert it to cash, it ends your relationship with that specific investment going forward. If the investment continues to grow after you sell it, you no longer benefit from that growth. If it pays dividends or other income, you no longer receive that income. And if you sell an investment you specifically wanted to hold for the long term, perhaps for its tax treatment, its role in your overall portfolio, or simply because you believe in it, selling removes exposure you may have preferred to keep.

None of this means selling is always the wrong choice, sometimes it's exactly the right one. But selling has real costs beyond the immediate tax bill, which is part of why some investors look for an alternative when they need cash but don't want to give up their position.

It helps to think about why you hold a particular investment in the first place. If it's part of a long-term retirement strategy, selling a chunk of it for a short-term need can quietly derail a plan that was working well, simply because the money is gone from that account and its future growth along with it. If the investment was more of a short-term holding without a strong reason to keep it, selling may be the simpler and more sensible path, without the added complexity and risk that borrowing introduces.

Capital Gains Taxes: Selling vs. Borrowing

When you sell an investment in a taxable account for more than you paid for it, you generally owe capital gains tax on the gain. Borrowing against an investment, by contrast, does not generally create a taxable event, because you haven't sold anything, you've simply used the investment as collateral for a loan.

Here's how that difference plays out with real numbers. Suppose you need $50,000 in cash, and you hold investments where 60% of the current value represents an unrealized gain, with a long-term capital gains tax rate of 15%. To net $50,000 after taxes, you'd actually need to sell about $54,945 worth of investments, paying roughly $4,945 in capital gains tax along the way. Borrowing the same $50,000 against your portfolio, by comparison, might cost around $4,000 in interest over one year at an 8% rate, but unlike the tax paid on a sale, that interest cost is not permanent and stops once the loan is repaid, and your original investment position remains fully intact throughout.

This comparison isn't a universal argument for borrowing over selling, interest rates, loan terms, and how long the loan stays outstanding all affect the real cost, and a loan that lingers for years can end up costing considerably more than the tax bill from a single sale. It does show why the tax difference between the two approaches is often the starting point for this conversation.

This example assumed a long-term capital gains rate, which generally applies to investments held for more than a year. Investments held for a shorter period are often taxed at ordinary income tax rates instead, which are typically higher, making the tax cost of selling an investment held for under a year potentially even more significant. This is one more reason the specific numbers matter enormously, rather than assuming any single example applies broadly to every situation.

How Borrowing Preserves Liquidity and Spreads Out Cost

Borrowing against an investment rather than selling it keeps your liquidity intact in an important sense: your investment portfolio remains invested and available to you, while the loan gives you access to cash for your immediate need. This can matter if you believe the investment still has room to grow, if you want to avoid disrupting a long-term strategy, or if you simply don't want to make an irreversible decision under time pressure.

Borrowing also allows you to spread the cost of a purchase over time, through structured loan payments, rather than depleting a large lump sum of savings or investments all at once. For some purchases, this better matches how income actually arrives, making a large expense more manageable within an existing budget.

There's also a practical, day-to-day dimension worth mentioning. Selling investments to fund a purchase is typically a one-time event, resolved once the trade settles. Borrowing introduces an ongoing obligation: a loan balance to track, interest that accrues over time, and the discipline required to eventually repay it. For some people, the simplicity of a one-time sale, even with its tax cost, is worth more than the ongoing complexity of managing a loan, regardless of which option is technically cheaper on paper.

Comparing the Full Cost of Borrowing With the Uncertain Return From Staying Invested

The core trade-off comes down to this: borrowing has a known, calculable cost, the interest rate, fees, and repayment terms of the loan. Staying invested offers an uncertain, potential return, your investments might continue growing at a rate that exceeds your borrowing costs, or they might grow more slowly, stay flat, or decline.

For this approach to work out favorably, the investment's return over the life of the loan needs to exceed the total cost of borrowing, including interest and any fees. There's no way to know this in advance with certainty, which means borrowing to avoid selling is, at its core, a bet that your investments will outperform your loan's cost, a bet that can go either way, and one that should be made deliberately rather than by default.

It helps to think about this trade-off across a range of outcomes rather than a single expected scenario. If your investments perform well over the life of the loan, borrowing can look like a clearly better decision in hindsight. If they perform poorly, or if you need to repay the loan sooner than planned, perhaps due to a market decline triggering a margin call, borrowing can end up costing considerably more than simply selling would have. Because you cannot know in advance which outcome will occur, this decision is really a judgment about probability and your own tolerance for that uncertainty, not a calculation with one guaranteed right answer.

The Real Risks of Borrowing Instead of Selling

This approach carries genuine risks that deserve honest consideration.

Market declines: if your investments lose value while you still owe the loan, you're now carrying debt against a smaller asset base, which can strain your finances further.

Loan interest: the cost of borrowing reduces your net benefit, and if it's higher than your investment's actual return, you can end up worse off than if you had simply sold.

Variable rates: if your loan's interest rate can rise, your borrowing cost can increase during the life of the loan in ways you didn't originally plan for.

Collateral requirements: many loans of this type require your investments to serve as collateral, meaning the lender has a claim on them if you can't repay.

Margin calls: for loans secured directly against investment holdings, a decline in the value of your collateral can trigger a demand for additional funds or collateral on short notice, sometimes forcing a sale at an inconvenient time regardless of your original intentions.

The possibility investment returns won't exceed borrowing costs: this is the central risk of the whole approach, and it's never guaranteed to work out in your favor.

These risks don't mean borrowing against investments is always a bad idea, but they do mean it should be treated as a real financial decision with real downside, not a clever way to avoid ever facing a trade-off.

These risks also tend to compound with each other rather than acting independently. A market decline that triggers a margin call is especially dangerous precisely because it often happens at the same time your investments are already down in value, forcing a sale at a worse price than you might have accepted if you had simply planned to sell on your own terms and timeline. Understanding how these risks interact, rather than evaluating each one in isolation, gives a more realistic picture of what could actually happen if circumstances turn unfavorable.

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