Financial Planning

Understanding Bridging Loans

Loans are those miraculous little jigsaw pieces that can really connect the events of your life together, so they can run smoothly for you. For instance, perhaps you’re trying to put your house on the market and need a loan to invest in some home improvements. Perhaps you don’t have the initial funds to pay for a much-needed vacation. Now there are plenty of sites online, such as this one, who can help you acquire these. However, you have surely heard of bridging loans, a prime example of how a loan can obviously bridge two transactions. Well, luckily I’m going to discuss it here! I have used bridging loans twice. My first experience using this form of financing was when we were planning to relocate to Denver. My wife had just secured a lucrative job as a basketball coach some years back, and we agreed to sell our home in Arkansas and buy another in Denver. After all, we had been planning to move to Denver for several years, only that an opportunity hadn’t surfaced.

While preparing for the ‘big’ move, I applied for a mortgage, but I had to wait for a couple of months before my loan was processed. But since we had just got a house in Denver and we would not want to waste time. John Wilkins, a former colleague, recommended a bridging loan to aid the transition. It was a new idea at the time, but it was undoubtedly worthwhile.

What is a Bridging Loan?

Ideally, a bridging loan is a short-term financing option used while anticipating ‘permanent’ financing. Like me, you could be waiting for your mortgage, but time is not on your side. A bridging loan can be accessed to meet your immediate financial obligations. However, these loans are only processed against collateral such as real estate property or business inventory by a bridge lender.

The good thing about bridging loans is that they are processed within a short time, and you are not burdened by unnecessary documentation. For instance, if you are currently experiencing a lag between a property sale and a potential purchase, you might take a bridging loan with your old house security for the loan. These loans are mostly used in real estate transactions, mainly to help close down a property quickly or retrieve property from foreclosure.

Types of Bridging Loans

A former colleague of mine, John (my current employer), told me that there are several options when it comes to bridging loans and that it would be better if I sought Independent Legal Advice before settling on any option. After all, all he knew is that bridging loans could help my situation. During my application, I realized that I had four options to choose from. After doing some digging, here is what I learned about these options.

  • Closed bridging loan: This loan is only availed for a predetermined period. Most lenders are likely to accept the closed loan as it gives them a high degree of certainty about the repayment.
  • Open bridging loan: This loan’s repayment methods and dates are usually not determined when inquiring about this loan. This option is appropriate for a lender who is doubtful about when their expected finance will be available.
  • First charge bridging loan: This loan assures the bridging loan lender of being paid first before any other lender.
  • Second charge bridging loan: The lender is paid after the first charge lender after the funds are available. These loans usually have a short-term repayment period, typically less than 12 months.

Why Bridging Loans

One of the main reasons why bridging loans are becoming popular is that they allow borrowers to secure opportunities they could have otherwise missed. They can be used for a range of purposes, such as buying property, renovating or developing property, or for any other short-term financing needs. Moreover, they are even available to borrowers with bad credit, making them an attractive option for those who cannot obtain a traditional loan due to a low credit score. In case you are thinking about how to get a bridging loan when you’ve got bad credit, then this article might come in handy.

As far as loan repayment goes, bridging loans offer flexible repayment terms. For instance, you might be allowed to start making payments while waiting for the money. But this aspect of flexibility depends on the agreed payment terms. Looking back, I was not sure that I would have bought the house in Denver had I waited for another month, waiting for my mortgage to be approved.

Most sellers today are reluctant to keep waiting when there is a buyer with ready cash. Another attraction to bridging loans is that they are approved faster than traditional loans. This saves you from unnecessary trouble, such as having to live in an apartment waiting for long-term financing. As far as bridging loans sound appealing, I was not comfortable with the high-interest rates and the burden of paying two mortgages. But as far as I could get what I wanted, the house in Denver, I can recommend these loans any day to anyone in a similar situation.

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