What Are Bridging Loans and How Do They Work?

What Are Bridging Loans and How Do They Work?

You may have heard of the term bridging loan or bridging finance before as it can be used in different situations, to help you out financially, short-term.

 

What Is A Bridging Loan?

A Bridging loan also known as bridge loans in the U.S  is a short-term, financial solution that gives you a loan from 2 weeks and up to 18 months.

 

They are essentially used to help bridge the gap of a financial problem. These are available to anyone who needs them, and you can get one through a lender.

 

However, you will need to qualify to get one. They will usually lend up to 75% of the security that you offer, but this does depend on how much equity is in the security.

 

The good thing about bridging loans is that you can pay the interest rate back monthly or you can even defer it and pay it back at the end of the loan.

 

However, one thing to consider is that with bridging loan costs, you also have to pay fees on top of the loan and interest, and these fees are things such as valuation fees, arrangement and legal fees.

 

These loans are great for if you need a short-term financial solution that is quick and easy to get.

 

Who Can Use A Bridging Loan?

Anyone can apply for a bridging loan; all you need to do is find a lender.

  • When you find a bridging loan lender, they will evaluate to make sure you are eligible and also make sure you have security before lending you the money.
  • The security is in the equity you have so this might be a property or business you own, and this is used as security against the loan, so they know that if anything was to happen, you have the additional security of your equity to help you. This covers the lenders as well.
  • Once approved, you will be able to get your money and have an agreed term with the lender of when it will be paid back.

 

What Are Bridging Loans Used For?

Bridging loans are used for many different reasons that are available to anyone. They act as a bridge with financial problems, so you can borrow money short-term, to resolve the issue. Examples are below:

  • Property Buying-If you’re buying a property and need money short-term to help pay it off, then a bridging loan can be used. Especially in the case that you are buying a property to renovate and then sell or rent afterwards, you can use a bridging loan to buy the house in full, straight away. This then gives you time to renovate it, sell or rent it and then pay back the loan.
  • Inheritance Tax-If you find yourself in a situation you’re not prepared for like inheritance tax; then you can use a bridging loan to help pay this back.
  • Inject Cash-Businesses can use this loan to inject cash into the business, whether it be for expanding the business or a new property being bought for business purposes. The money borrowed can be used to increase cash in the business, which will then be paid back.

 

What Is Needed To Apply For A Bridging Loan

When you are looking at getting a bridging loan, one thing you need to make sure you have is security for the loan.

 

This can be in equity so something like a property you own and this is used as security with the loan as it ensures you can pay it back. Not only does it cover you but also the lender giving you the money.

 

When you apply for a loan, the company you are lending from will evaluate this and see what equity you have to use as security, and this will then determine how much they will lend you.

 

How Does A Bridging Loan Work?

With bridging loans, there are two types available, open and closed loans.

  • Open Bridging Loans

An open bridging loan means there is no fixed repayment date, but you will be expected to pay it off within a year.

  • Closed Bridging Loans

Opposite to open bridging loans, closed ones have a fixed date for repaying the money, so you are given a date of when it needs to be paid by. This bridging loan would typically be used in a property situation where someone has bought a property but awaiting the contracts to complete the sale.

 

When going to a lender for a bridging loan, they will need evidence that you have a clear, repayment strategy. This could be something like using the equity of a property or business, and they will require this as a type of security.

 

This works in a way where the more security you have in equity, the more money they will be happy to lend you, as they know you will be able to pay it back, even if you were struggling to.

 

You should always make sure to have a back-up plan in place in case anything was to go wrong with paying the loan back.

 

Bridging Loan Costs and Calculator 

With bridging loans, they are priced monthly, rather than yearly like a mortgage is and this is due to them being taken out for a short period of time. The interest rate can vary from as low as 0.4% per month, this will depend on your situation however.

 

Bridging loan costs also include fees to be considered such as valuation fees, arrangement fees and legal fees. It would help if you were sure that when taking out a bridging loan, that you can pay it back quickly as the longer you have it, the more interest you will pay on it.

 

To know how much a bridging loan cost is dependent on how much is being borrowed. A bridging loan calculator can be used to work out what the bridging loan cost will be along with interest and additional fees that may be incurred in the process.

 

This way you can make sure you that you can pay it off in a short amount of time and bridging loan calculators can be found for free online.

 

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