What Exactly Is A Bridge Loan?
Sep 11th, 2008 | By Alan Harding | Category: FinancesA 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.
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.
Business owners may apply for bridge loans to finance their needed working capital for an investment while their equity financing deal is still in the process, which usually take several months to complete.
Bridge loans are often used when selling real estate. This can be useful when the real estate market is slow or a particular house is not selling fast enough. Homeowners who want to sell their homes and buy a new one utilize bridge loans to finance their various obligations such as utility bills and food bills, while their old home is still on the market. Also, they may use the bridging finance as “chain breaking”, meaning they use the loaned amount to purchase a new house while they are still on the process of dealing their current house to prospective buyers.
Another useful aspect of bridge loans is they can be used to boost credit scores. Bridge loans may be used by borrowers to pay outstanding debts, thus making a positive credit score and enabling the borrower to apply for other loans that are more permanent and larger in amount. These loans also help bridge the gap between leaving one job and starting another. Similarly, bridge loans may be useful to finance relocation costs when someone moves because of their 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.