How To Utilize a Bridging
Loan and How It Works
The COVID-19 pandemic struck a blow to global economies and now the cost of living crisis is beginning to bite. One consequence is that lenders are tightening their purse strings and more and more of us are finding credit harder to come by.
However, a bridging loan can be an effective solution to a short-term delay in obtaining good credit. Lenders who offer these kinds of loans specialize in providing fast credit with relatively few questions asked. As such, whilst bridging loans rates are typically a lot higher than high street loan rates, they can prove very useful. Let’s take a closer look at how bridging loans work, some bridging loan terms and bridging loan options.
What Is a Bridging Loan?
So what is a bridging loan? As the name suggests, a bridging loan is a loan that can be used as a bridge over financially troubling waters.
For example, let’s imagine that the opportunity arises to buy a great business for a bargain price, but the owner wants a quick sale. Obtaining a proper business loan could jeopardize this as most lenders can take weeks or even months to consider applications. A bridging loan however is a fast, short-term loan which you could obtain to buy the business. Once you have successfully secured the business, you would then look to refinance via other lenders.
How Bridging Loans Work
This kind of loan is usually arranged with relatively short repayment periods and relatively high interest rates. Typically, getting a bridging loan for property development is the most common reason they are taken out. This allows one to quickly inject cash into a property purchase or renovation with the view to sell the property soon after, to be able to pay back the loan avoiding lots of high interest payments.
Bridging loans have high interest rates and short, fixed repayment periods. Whereas a mortgage can be entered into with a term of 15 – 30 years, a typical bridging loan term is between 6 months to 5 years. As such, most bridging loans are eventually repaid by other, ‘normal’ loans.
The advantage of bridging loans is that they can be arranged fast and afforded to applicants with lower credit ratings.
Who Can Take a Bridging Loan?
Most bridging loan lenders will only lend on some form of security. Therefore, the lender will want to register a charge or take collateral from either the asset you are looking to buy, or from an existing, unencumbered asset.
For example, if you are seeking a bridging loan to buy a business then they will want the business as collateral. If you cannot keep up the payment terms, they will look to exercise their rights and take control of the business. Note that the monthly payments are usually high so there is a very real risk of this happening.
Alternatively, if you owned a mortgage free property you could register the bridging loan against it. However, if you owned a mortgage free property you may be better off looking for a remortgage or secured loan from a high street lender.
Note that whilst many mortgage lenders will offer a 90% loan to value when lending on a property, a more accurate loan to value ratio for a bridging loan is 65%.
When To Take a Bridging Loan?
Bridging loans can be very useful under certain circumstances. For example, if you need to get credit fast, then a bridging loan could be the solution. They are issued by high-risk lenders and can sometimes be turned around inside 24 – 48 hours.
Bridging loans can also be useful for anybody with a bad credit history who cannot get finance elsewhere. However, before taking out a bridging loan you really do need to have a plan as to how you intend to repay it.
Typical Bridging Loan Rates (comment in USA, that’s our focus)
As of April 2022, Bridging Loan rates for property purchases typically range from between 8.5% – 10.5%. Bridging Loan rates for business can even range from 15% – 25%.
Note that this may soon rise if the Fed decides to raise base interest rates in response to the cost-of-living crisis.
Bridging Loan Terms
Lenders who offer bridging loans are usually seeking repayment soon. Remember, by design a bridging loan is a temporary solution and as such, repayment periods start at around 6 months. Whilst some bridging loans are available over longer periods, these are rare, and 12 months is the common outside repayment period.
This means that the borrower MUST repay the loan in full within this timeframe and failure to do so may result in the lender taking action or looking to repossess or foreclose on the security asset.
Final Thoughts on Assessing Bridging Loan Options
We have now looked at how bridging loans work. Whilst bridging loan rates can be very high, they can nevertheless be a perfect solution to a temporary credit problem if you do your homework and work out exactly how to repay the bridging loan. Just remember that bridging loan terms can be shorter and harsher than other forms of credit so be sure to examine your bridging loan options before entering into a loan agreement.
