What Is a Portfolio Loan?
A portfolio loan is held permanently by the lending institution that extends it. Since the loan is never sold on the secondary market, it does not need to be investment grade. This affects the loan terms, risks and costs.
Generally, portfolio loans have more flexible terms than investment grade loans. These may include a low down payment, multiple cash-out options and highly variable interest rates.
While the loan terms above may sound enticing to a borrower having difficulty getting a loan, this type of loan is actually highly risky. The loan does not need to meet market standards. This means the lender can extend loans even if there is a high possibility of default or if the lender has reason to believe the borrower cannot afford the loan.
Anytime a loan is highly risky, the cost will go up. Portfolio loans tend to have higher interest rates. This helps compensate for the fact that the lender cannot sell the loan for cash in the immediate future. Since the lender is locking up all of the money used to make the loan, the borrower will have to pay a premium to receive portfolio financing.