What Exactly Is A Bridge Loan?

by Alan Harding

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 commonly use bridge loans when they are selling a home. There can be times when the real estate market in a given area is moving slowly, or there can be a home that is proving a hard sell. The owners of the home who are selling the house and want to move may take out a bridge loan so that they can pay their utility and food bills, as well as other financial obligations, while they await the sale of their home and the proceeds that they get from that. Or they may use the bridging finance as “chain breaking”, meaning they purchase an already-desired new house while they are still awaiting the sale of their current house.

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.

Often, you can receive a bridge finance in just 24 hours, since the need for extensive background checks and risk consideration are minimized by the high interest rate, short duration, and collateral backing required.

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