property purchase as an individual or investing in a new venture if you are looking to widen your business, loans always come in handy.
Sometimes, the nature of the requirement will be such that you will have too little time to react and tap into the conventional sources of loans. In such situations, a bridging loan comes in most handy! They are also available for more conventional reasons as well such as home improvement, refinancing, repossession prevention, etc. Where it really fits the bill is when you are treating it as a stop-gap arrangement or make the most of a short-term opportunity before you are ready to take your larger loan plunge.
What is a bridging loan?
A bridging loan is a type of secured loan. It is granted against property such as homes, plots and vehicles. Bridging loans have the shortest tenure among all loans spanning no longer than 18 months. At the end of the tenure, you need to repay both the interest and principal to close the loan.
Bridging loans are most notably the ‘go-to’ option among businesses to help boost cash flow by releasing equity.
Sound too good to believe? Unfortunately, that’s where the benefits of bridging loans end. It has as many pros as it has cons. Let’s see what these are:
- They are of two types: open and closed. The former is a bit riskier not just to the borrower but also to the lender.
- Although you need not pay interest every month, at the end of the both the interest and principal may add up to some unwieldy sum to pay.
- The interest rates are a bit heavy although companies offer the most competitive rates ever! This is because of the inherent risk your lender perceives. This process is what is called the loan-to-value ratio.
- Few agents are available to help you get a bridging loan.
- It may also involve cross-collateralization, where you are required to by your lender to let two assets of yours stand as collateral.
- You need to have a very credible, viable exit strategy with bridging loans.
