Bridging loans have quickly become a popular choice for financing due to their many benefits.
But what exactly are bridging loans, and what makes them such a great option? In this post, we will take a closer look at bridging loans and explore why they are such an ideal type of financing.
What is a bridging loan?
A bridging loan is a type of short-term loan that can be used to ‘bridge’ or fill the gap between two financial transactions. They are typically used when traditional forms of financing, such as bank loans, are not an option or would take too long to secure.
Bridging loans are typically secured against property, which makes them a low-risk option for lenders.
For example, if you are buying a new home before your old home has sold, you may take out a bridging loan to cover the down payment on the new home.
Bridging loans can also be used to cover the gap between the time you need to pay for a large purchase and the time when you will actually receive payment from the sale of another asset.
Why are bridging loans an ideal type of financing?
There are several reasons why bridging loans are an ideal type of financing.
Speed: Firstly, bridging loans are a fast way to get funding. Bridging loans can be approved and funded quickly, often within days or weeks. This is much faster than other types of financing, such as banks.
This can be important if you need to close on a home purchase or pay for a large purchase before you receive payment from the sale of another asset.
Flexibility: Bridging loans can be structured in a variety of ways to suit your needs. For example, you can choose to make interest-only payments during the loan term, which can lower your monthly payments.
Or, you can opt for a balloon payment at the end of the loan term, which can help you save on interest costs.
Purpose: Bridging loans are short-term loans that can be used for a variety of purposes, including home renovations, purchasing a new car, or consolidating debt.
Hassle-free: They are ideal for people who need access to cash quickly and do not want to go through the hassle of applying for a traditional loan.
What is the usual duration of a bridging loan?
Bridging loans are short-term loans. They are usually taken out for a period of 6 to 18 months but can be extended to 2 years in some cases.
What do you need to get approved for a bridging loan?
To get approved for a bridging loan, you will typically need to provide proof of income, employment history, and assets.
You may also be required to have a good credit score. The exact requirements will vary by lender. But in general, the process of applying for a bridging loan is much simpler and faster than applying for a traditional bank loan.
In most cases, lenders will only look at your asset as collateral for your loan. This means that to qualify for a bridging loan, you will only need to have good collateral to secure the loan. This could be in the form of real estate equity or other assets.
The better your collateral is, the lower the interest rate you will pay on the loan.
What happens at the end of a bridging loan?
At the end of the loan period, you will need to repay the outstanding balance in full. If you are unable to do this, you may be able to extend the loan or roll it over into a new loan. However, you should be aware that this may incur additional fees and charges.
If you are unable to repay the loan, you may face some serious consequences. The lender could foreclose on your property, meaning that you would lose your home or whatever asset you put into the loan as collateral.
Alternatively, they could take possession of your asset and sell it to cover the cost of the loan. Either way, defaulting on a bridging loan can have serious consequences, so it is important to make sure that you are able to repay the loan before taking one out.
Some important reminders in taking out a bridging loan
Are you thinking about getting a bridging loan? Here are some things to remember:
- Bridging loans are typically secured against property, so make sure you have good collateral to secure the loan.
- Bridging loans are short-term loans. This is why you need to have a plan in place to repay the loan within the timeframe.
- Interest rates on bridging loans can be high, so be sure to compare rates from multiple lenders before taking out a loan.
- Make sure you understand all the terms and conditions of the loan before signing any paperwork.
Key takeaway
Bridging loans can be a great option if you need access to cash quickly. They are typically fast and easy to apply for and can be structured to suit your needs. However, it is important to remember that they are short-term loans with high-interest rates.
Be sure to compare rates from multiple lenders and understand all the terms and conditions of the loan before signing any paperwork.
If you are thinking about taking out a bridging loan, consider consulting with an expert who can help you find the best deal possible.