(Eg where I live, there's no capital gains tax, so someone like Elon Musk could just sell their shares without any extra taxes, instead of having to borrow against them.)
Notably, the rich do not have problems with "credit score", which never seems to apply to them.
First, the banks charge you interest depending on amongst other things the risk incurred. More risk, more interest. (Look at eg junk bonds for an example.)
Second, when you borrow against your stock, you typically only get, say, 50 dollars loaned for every 100 dollars of stock. (Details vary.) If the value of your stock drops anywhere close to eg 75 dollars, typically the bank has the right to sell some or all of your stock to pay off the loan.
If your stock dropped so quickly that it's gone before the loan has been paid off, the bank might or might not come after your other assets. Whether they can do so, depends on the contract you have with them. Again, if it's a non-recourse loan, you are going to pay higher interest, and they'll demand more conservative loan to value ratios.
> If the stock goes up, you can pay off the loan and keep the difference.
Third, why would you pay off the loan, and with what money? The whole point of the scheme is to never sell stocks, so you never have to pay capital gains taxes.
You just let your loan's balance accumulate over time with the compound interest.
(One popular scheme is called 'buy-borrow-die': because of a quirk in the US tax system, you don't pay capital gains taxes when you die. So you acquire stock somehow, then borrow against it, and you pay off the loan only when you die: your estate or the bank sells enough stocks to cover the loan, and doesn't have to pay capital gains taxes.)
The banks are happy to let you run up a balance, as long as your loan-to-value ratio stays low enough. Ie as long as your stocks grow sufficiently faster than your outstanding loans.
> Notably, the rich do not have problems with "credit score", which never seems to apply to them.
Credit scores are a standardised system to deal with average people. If you are rich enough, the bank can afford to have a real human look into your specific situation, instead of relying on a number.
As as a slightly made up example: Elon Musk is known for getting into legal fights and being annoying to deal with, and trying to wiggle out of obligations. So creditors might charge him more interest purely for that risk. Whereas Michael Bloomberg always stick so this agreements, and a handshake from him is a firmer commitment than an thousand page contract with Elon Musk that covers all eventualities.
Paradoxically, someone who is known to to be able to afford expensive and competent lawyers might have to pay higher interest rates than some middle class Joe Average. It's not that the bank thinks Elon Musk has a higher risk of running out of money than Joe Average; but it's that the bank fears that Elon Musk is harder to sue than Joe Average is to foreclose on.
