What Exactly Is A Bridge Loan?
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A bridge loan is a loan that a person (or sometimes a business) takes out for only a short time–no longer than one year. The purpose of the bridge loan, or bridging finance, is to give the borrower needed cash until he secures a more long term loan or receives funding. The immediate cash flow that is provided by the bridging finance allows the borrower to meet current financial obligations while a deal or contract is still in process or being negotiated.
You can expect your bridge loan to carry a high rate of interest, and you will need to secure it with collateral. Bridge loans work by bridging the gap between the time a borrower meets his immediate financial obligations until such time he can avail of a more permanent and long term loan. People use bridge loans in numerous 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.
Another use for bridge loans is to repair one’s credit. A person may borrow the money needed to pay off creditors so as to increase one’s credit score, making it more probable that one can then get a larger, more permanent loan or be able to be approved to rent a new apartment. People also use bridge loans when they are in between jobs but fully expect to be hired very soon or are just waiting to start. Along those same lines, these types of loans may be used to finance a relocation for work related purposes.
Bridging finance can be done in less than a day, as the high interest rates, short duration, and collateral backing allow for less stringent credit and background checks.