What Exactly Is A Bridge Loan?
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.
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.
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.
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 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.
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