As you’ve investigated your options for financing, you may have come across a type of loan called a bridging loan. Bridging loans provide consumers with large sums of monies quickly. These types of loans are not for everybody, but if you are in a serious financial bind, they may provide a way out.
What is a Bridging Loan?
Bridging loans close the gap between the funds you currently possess and funds you expect to possess in the future. These loans allow you to pay obligations immediately rather than waiting for a more permanent source of funding to come in.
Bridging loans possess the following characteristics:
- They are for fairly large amounts of cash. Usually, bridging loans provide borrowers with £100,000 or more.
- They are expected to be short-term. High interest rates make them not cost effective for long-term projects.
- They can be arranged quickly. In many cases, funds are available in as little as seven to 14 days after the initial request is made.
- Terms are customisable; you can choose a repayment period that fits your individual needs.
- Your credit status is not an issue when being evaluated for the loan.
What Types of Loans Are Available?
There are many options when it comes to bridging loans. However, these loans can be divided into three categories.
- Property Development. These loans can be secured to place a down payment on a piece of property, renovate a property or otherwise pay for real estate expenses. Property development loans are ideal for those who do not qualify for ordinary mortgages due to poor or absent credit history.
- Asset Based Financing. Bridging loans are often used to cover initial repayment of long-term obligations. This strategy is successful if the other lender will require less money prior to the maturity of your bridging loan. For example, if you pay £500,000 using a bridging loan but only have to pay £3,000 afterwards, a bridging loan may save you on interest payments.
- Short-Term Investments. Bridging loans can be used to finance your initial investment into a company or property. The loan pays for itself when you receive large dividends from your investment.
What are the Criteria for Qualification?
Credit status does not influence your ability to secure a bridging loan. Instead, loans are determined based on 80 percent loan to valuation. This means that the loan must be for no more than 80 percent of the assets you are financing with it. For example, if you seek a loan of £100,000 to purchase a home, the home must be valued at no more than £80,000. Borrowers can put up additional securities if they desire a loan to valuation of 100 percent.
What are the Terms of the Loan?
Terms are often customised to meet the borrower’s unique needs. Most bridging loans have terms such as the following:
- Interest payments of 1 to 2 percent. In some cases, borrowers can defer interest payments until the principal is paid off.
- One-off facilitation fees.
- Penalties for early repayment in some cases.
What Reasons Would A Borrower Have for Avoiding Bridging Loans?
Bridging loans are not appropriate for everybody. As with any loan, borrowers must make responsible choices and not borrow more than they can afford to pay back. In addition, bridging loans are not for people in the following situations:
- People who only need small sums. Bridging loans are for people who need a large amount to tide them over until longer-term funds become available. Typically, a bridging loan is for an excess of £100,000.
- People who need long-term funding. Bridging loans are only cost effective in the short term because of high interest rates.
These loans are appropriate for people who need a large sum of cash fast and have the means to repay it quickly. Contact a bridging loan lender for immediate assistance if you fall into this category.