Bridge loans are a type of short term credit facility that is offered to consumers who are waiting for approval of long term financing. They can be used for a wide range of applications including real estate, business and personal finance among others. These loans are normally used for temporary or short term financing. When the larger, longer term credit facility is made available, the bridge loan is paid off. These loans have a number of benefits and uses. Read on to learn more.
What to Keep in Mind When Looking for Bridge Loans
Bridging finance is normally more costly than other conventional financing options. Interest rates are usually several percentage points above prevailing market rates. The credit facility must also be secured by some form of collateral. Normally, real estate is used as security for bridge loans. Business owners can also use the current market value of their inventory as collateral for the loan. It is difficult to get a loan whose value is equivalent to the current market value of the collateral. Normally, lenders offer loan-to-value ratios ranging from around 65% to 85%. This may vary from one lender to another.
Who Needs Bridge Loans?
Anyone who has a reliable income source can procure a bridge loan. However, this credit facility is very popular in the real estate industry. Homeowners who want to sell their current home and buy another one can make good use of bridge loans. Selling a piece of real estate takes time, but the homeowner may need a significant amount of money urgently to make a downpayment on another property. The homeowner can procure a bridge loan, using the old property as collateral, and secure the new house. Once the old house is sold, the homeowner can repay the bridge loan.
Business owners can also get a bridge loan to fund their operations. When a firm experiences equity problems due to one reason or another, an equity injection through a bridge loan may help keep its doors open. Other individuals who can benefit from these loans include property developers, distressed homeowners and contractors among others.
Hard Money Loan Vs. Bridge Loans
There are many people who assume that bridge loans are the same as hard money loans. While they may share a lot of similarities, the two are completely different. For instance, the former is offered by private equity firms, individuals and private investors, while the latter is offered by both mainstream and alternative lenders. The repayment period of these two credit facilities range from two weeks to around three years. A bridge loan can either be closed or open. The former means that the term of the loan is predetermined, while the latter means that the repayment period has not been set.