What Exactly Is A Bridge Loan?
A bridge loan is basically a short term loan — usually repaid in less than a year. The reason for a bridge loan, or bridging finance, is to cover the expenses of the borrower until a more long term loan or funding is secured. Bridge loans provide immediate cash flow for borrowers as payment for various abrupt financial obligations while waiting for the approval of standing deals or contracts.
Bridge loans have high interest rates and need to be backed by collateral. What they do, as their name suggests, is to bridge the gap between a time when the borrower has the more permanent loan or financing that he’s seeking and the present with its immediate financial needs. Bridging finance is used in many different financial situations.
The owner of a business may secure bridging finance in order to secure needed working capital while he completes equity financing deals which can often take several months.
People often resort to bridge loans when they are planning to sell a home. The real estate market in a specific area can move slowly at times, or a home can just be difficult to sell. People who purchase a new home before selling their existing home may take out a bridge loan so that they can pay for their expenses and financial obligations until a sale is finalized on the existing home and they have access to the proceeds. A bridge loan may also be used as “chain breaking”, meaning a borrower may use it to purchase a new house even while their old house is still on the market.
Bridge loans are often used to protect or improve one’s credit record. A borrower may apply for a bridge loan to finance payment of an outstanding debt, thus making a good credit standing and allowing one to apply for other loans that are more permanent and larger in amount. While they are still moving from one job to another, or waiting to be hired, people may find bridge loans indispensable. Likewise, people can also use of these types of loans to cover cost of relocation demanded by a new job.
Bridging finance can often be acquired in just 24 hours, as the high interest rate, short duration, and collateral backing alleviate the need for extensive background checks and risk consideration.
