Real Estate

Define a Bridging Loan

Story Published on June 18, 2008 ⋅  Email this Story ⋅  Print this Story ⋅ Post a comment ⋅

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.

Taking a bridge loan means you will be paying a high rate of interest, and you must back it with collateral. These types of loans, like their name suggests, bridge the gap from when the individual receives more long-term loan and his direct financial obligations. Bridging finance may be utilized in a variety of financial scenarios.

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 useful aspect of bridge loans is they can be used to boost credit scores. Bridge loans may be used by borrowers to pay outstanding debts, thus making a positive credit score and enabling the borrower to apply for other loans that are more permanent and larger in amount. These loans also help bridge the gap between leaving one job and starting another. Similarly, bridge loans may be useful to finance relocation costs when someone moves because of their job.

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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