A margin loan is money you borrow from your brokerage firm, using the securities already in your investment account as collateral, so you can buy more securities than your cash alone would allow. Under federal rules, you can borrow up to 50% of a stock’s purchase price at the time you buy it. That leverage works in both directions: gains are larger when prices rise, losses are larger when they fall, and if your account value drops far enough the broker can sell your holdings without asking you first.
How the Borrowing Actually Works
In a cash brokerage account, you can only buy what your deposit covers. Put in $5,000, and $5,000 is your ceiling. A margin account changes the math. With that same $5,000, you could buy up to $10,000 of stock, with the other $5,000 coming from the broker as a loan.
The securities you own sit as collateral behind that loan. That gives the broker a legal claim to sell them if you cannot repay or if their market value slips too low. The loan balance moves with your borrowing, your repayments, and the interest the firm charges. The collateral’s value moves with the market, every trading day. All of the terms, including the interest rate, the collateral thresholds, and the broker’s right to liquidate positions, are laid out in the margin agreement you sign when the account is opened.
What It Costs
Margin loans carry variable interest rates tied to a benchmark such as the federal funds rate or the firm’s own base rate, with a spread added on top. As of early 2026, published rates at major U.S. brokerages range from roughly 4.5% on very large balances to over 11% on smaller ones.1Interactive Brokers. US Margin Loan Rates Comparison
Almost every broker uses a tiered structure, so the more you borrow, the lower the rate. Interest is charged to the account monthly and compounds, which means the loan itself grows even when you are not borrowing more. That growth quietly pushes your equity ratio down and moves you closer to a margin call, even in a flat market. And because the rate is variable, the cost you signed up for is not the cost you will necessarily be paying six months later.
The Two Percentages That Govern the Loan
Two rules determine how much you can borrow and how much you have to keep on hand once you have borrowed.
Initial Margin: 50% at Purchase
The Federal Reserve’s Regulation T sets the initial requirement. For most equity purchases, you must put up at least 50% of the price with your own funds; the other 50% can come from the loan.2eCFR. 12 CFR 220.12 – Supplement: Margin Requirements So $10,000 of stock requires $5,000 of your own cash or eligible securities in the account. That 50% applies only at the moment of purchase.
Maintenance Margin: 25% (or More) Thereafter
After the trade settles, a second rule takes over. FINRA Rule 4210 requires you to keep equity of at least 25% of the current market value of your long positions at all times.3Financial Industry Regulatory Authority. FINRA Rule 4210 – Margin Requirements Equity means the market value of your securities minus your loan balance. Most brokerages set their own “house” maintenance requirements higher than the FINRA floor, often 30% or 35%, and those house numbers are what actually trigger calls at most firms.
Margin Calls and Forced Sales
A margin call is what happens when your equity drops below the maintenance requirement. The broker demands that you deposit enough cash or securities to bring the account back above the line. After the shift to T+1 settlement, the payment period for a Regulation T (initial) margin call is three business days from the trade date.4Financial Industry Regulatory Authority. Understanding Settlement Cycles: What Does T+1 Mean for You? Maintenance and exchange calls at some firms must be met in two to four days.5Vanguard. How to Handle a Margin Call
Now the part that catches many investors off guard. Your broker is not legally required to notify you before selling your securities. FINRA is explicit on this. Firms do not have to issue a margin call before liquidating, they can sell enough to pay off the entire loan rather than just enough to meet the call, and they do not have to let you choose which positions go.6Financial Industry Regulatory Authority. Know What Triggers a Margin Call
The broker’s priority during a liquidation is protecting the firm’s capital. Your holding period, your tax situation, your pending limit orders, none of that governs the sale. And because margin calls cluster during sharp declines, forced sales tend to hit at exactly the worst prices.
What You Are Actually Risking
The single most important fact about a margin loan is that you can lose more money than you put in. If your securities fall far enough, the broker sells them, and the proceeds still fall short of your loan balance, you owe the difference in cash. Buying stock outright caps your loss at what you paid. Margin does not.
Layered on top of that, several risks feed each other:
- Forced liquidation at the worst time. Calls come during steep drops, so you sell low, and you do not pick which positions go. That can create unplanned taxable gains or lock in losses on holdings you meant to keep for years.
- Interest erosion. At rates near or above 10% for smaller balances, your investments have to beat that cost just to break even. In flat markets, the interest quietly eats the return.
- Compounding in reverse. Monthly interest raises the loan balance, which lowers your equity percentage, which moves you toward a call, even if your portfolio’s market value has not budged.
- Rate increases. Variable rates can climb without warning, and a loan that was cheap when you took it out may not stay cheap.
Tax Treatment of the Interest
Margin interest is investment interest expense. You can deduct it on your federal return, but only up to your net investment income for the year.7Office of the Law Revision Counsel. 26 USC 163 – Interest Net investment income generally means interest, ordinary dividends, and certain royalties, minus related expenses. Qualified dividends and long-term capital gains are not counted unless you elect to include them, and making that election means giving up the lower capital gains rate on the amount you include.8Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
Interest that exceeds your net investment income in a given year carries forward indefinitely. You claim the deduction on IRS Form 4952. One flat exclusion: interest on funds used to buy tax-exempt securities such as municipal bonds is not deductible.9Internal Revenue Service. Form 4952 – Investment Interest Expense Deduction
Not the Same as a Securities-Based Line of Credit
A margin loan is often confused with a securities-based line of credit, and the distinction matters. A margin loan sits inside your brokerage account and can only be used to buy more securities. A securities-based line of credit is a separate lending facility, also secured by your portfolio, that can be used for almost anything except buying securities: paying taxes, funding a home purchase, covering business costs. Some lenders on those separate facilities also give you more time to cure a collateral shortfall before liquidating. Regulation T prohibits using margin loan proceeds for non-securities purposes, so treating the two products as interchangeable can create a regulatory problem in addition to a strategic one.