What Exactly Is A Bridge Loan?

A bridge loan is basically a short term loan — usually repaid in less than a year. The reason for a bridge loan, or bridging finance, is to cover the expenses of the borrower until a more long term loan or funding is secured. Bridge loans provide immediate cash flow for borrowers as payment for various abrupt financial obligations while waiting for the approval of standing deals or contracts.

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.

Business owners may acquire bridge loans to finance the needed working capital of their business while awaiting equity financing deals which could only be completed after 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.

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.

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.

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posted Wednesday, August 25th, 2010
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