What Is A Bridging Loan Anyway?

In layman’s terms a bridging loan provides the borrower with a cash ‘bridge’ whilst they wait for another form of finance to become available and enable them to pay back the loan.

Sounds simple, right? Well actually the reality of this type of loan is a bit more complicated and it isn’t a finance option that should be taken on lightly. Bridging loans are flexible, usually short-term, and are likely to be secured against property, so the risk of losing your home or business premises if you fail to make the repayments is very real.

Here is a quick breakdown of the bridging loan basics and the pros and cons of this type of finance:

What are they used for?

In general bridging loans are only used for property finance, for example to provide cash for a property purchase before your existing property has been sold. This makes it a useful tool for property owners who are looking to downsize, perhaps as they get older, and in recent years property developers have also been taking advantage of this type of finance.

Other situations that would make a bridging loan appropriate are: broken chains, auction purchases, retentions and renovations, and discounted purchase opportunities.

Who can apply for a loan?

In theory anyone can apply for a bridging loan and with amounts as little as £50,000 available to borrow you don’t need to be moving from one sweeping estate to another to make this type of finance worth it.

What are the pros?

The biggest plus points of this type of loan is that they can be extremely flexible and make it easy for time sensitive opportunities to be taken advantage of. Another bonus of a bridging loan is that they can usually be arranged very quickly, sometimes in as little as 48 hours.

The speed and the tailored approach are usually the reason that people use this option rather that looking at other forms of finance.

What are the cons?

Whilst the speed at which the loan can be arranged is a major bonus it is also the reason behind one of the biggest cons, high interest rates. Loan companies also tend to place incredibly harsh penalty interest rates if you are late with a repayment.

However, as interest rates are worked out on a yearly rate and a bridging loan is usually paid back within a few months you may not end up paying as much interest as you think.

Final words

The bottom line is that you should only look into bridging finance if you can guarantee you can pay the loan back in the designated time. This might be three, six, nine, or even 12 months.

The key to making a bridging loan work for you is to make sure you understand the terms and conditions of your contract, are prepared for any additional costs, and know your options should you fail to repay the loan at the end of your contract.

Harry Price writes on aspects on modern life and the trials of moving house.

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