What Is A Bridging Loan? How Does It Work?
When you are in a cash crunch for a short time, borrowing money for that short period will help you out of the situation. That’s when bridging loans come in.
A bridging loan is generally provided against property or land with a repayment period of 1 to 2 years. In some situations, the repayment period can be increased to 3 years too.
There are a number of reasons why people go for bridging loans – it may be to secure funding for a property purchase, to support financial transactions, to get funds for refurbishments or to fill in during a cash crunch for business operations. Whatever the reasons are, the one main driving factor for bridging loans is the fast access to the funds.
In the beginning, the bridging loans were provided with a high rate of interests and fees due to the high risk involved. But soon, many lenders like Finanta found the demand in the market for bridging loans at many affordable rates which paved way for low interest bridging loans. This also led to the inclusion of some risky situations for which bridging loans were denied earlier.
What Are The Types of Bridging Loans?
Bridging loans have gained popularity as banks refuse to give loans for risky conditions or highly critical deals. Here are some of the types of bridging loans provided.
1. Commercial Bridging Loans
When one is developing a commercial property or need financial support to purchase a commercial property, commercial bridging loans helps to quickly get access to the required cash.
2. Residential Bridging Loans
When buying a residential property, the person buying the existing property may withdraw at the last minute leaving no option to buy the new property. At such times, a residential bridging loan will provide financial cover for the time from which the new property is bought to the time when the old one is sold.
3. Auction Bridging Loans
During auctions, the buyer needs to provide the money on the successful bid item within 3 to 4 weeks. Auction bridging loan is the best option to get such a huge amount of cash in a short time.
4. Refinancing Bridging Loans
This option comes in handy when you need to secure extra cash but you already have an existing bridging loan. By refinancing the already present bridging loan, you can use this to cover the unexpected overhead costs in projects.
5. Refurbishment Bridging Loans
When the property owners or property developers need to expand on a property, refurbish it or develop it to make the sale in the market, refurbishment bridging loans can help.
Types of Bridging Loan Interests
Apart from the type of bridging loans based on the applications, there are further two more overall types of bridging loans based on the interest options.
1. Rolled Up Interest
In this, the borrower doesn’t need to pay any monthly installments for the loan amount taken as the interest for each month will be added to the total loan amount which will be paid at the end of the loan term.
2. Retained Interest
Here too, there is no need for monthly payments. The difference is that the borrower can keep the equivalent amount of all the monthly interests from the loan amount. But the interest rates will be charged on the sum of the loan amount and all the monthly interests. But when the loan amount is repaid, if the part of the retained interest wasn’t used, then you can get an equivalent credit for it.
How Can You Get Bridging Loans?
To start with, you will approach a good lender who is open to provide a good interest rate for your criteria. The process will start with you submitting the reasons for bridging loan with the details about the security available.
The lender will review the proof of the property and security submitted and if everything is in acceptable condition, you will receive an offer from the lender with details about the bridging loan they are ready to offer and further steps to get the loan.
You will also be asked for a valuation report on the property or sometimes, the lenders will assess the value on their side too. Depending on the value, you can negotiate the loan amount and the interest rates. Once everything is finalized, you will sign all the required documentation and the cash will be released to your account in a week or two.