While there are many types of loans designed to help an individual to finance something in the long term, whether this is an event such as a wedding or a long-term project that will become profitable once it’s finalized, there are also lesser known loans which are more-so suited for the short term, and this includes a bridging loan.

What Is A Bridging Loan

While they are starting to become more commonly used to help keep someone financially stable in short-term situations, this does still beg the question of how exactly they work, and why you would consider using them over other types of personal loans. 

Here is the full breakdown of a bridging loan so that you can know whether it’s the right type of loan for you to take out depending on your current situation.

How Does A Bridging Loan Work?

Bridging loans are short-term loans that will provide a person with just enough money so that they can get through a period before they are expected to make more money in the near future, in this sense, it is a way of helping someone ‘bridge the gap’. 

They are typically taken out for a period of 2 weeks or several months, and while they are commonly called bridge loans in the UK, they have also been referred to as “caveat loans” throughout history aswell as “swing loans”. 

When Would You Use A Bridging Loan?

While they can be used for a multitude of scenarios, bridging loans are most commonly taken out when buying a new property, and more specifically when you need the extra money to buy a new house before selling another. 

In this way, the person knows they will be able to make back the money from selling their current or old property, but need extra money to buy a new property first. 

For example, when you need to pay a deposit on a house but are a few thousand pounds short, using a bridging loan can help you secure the house, which you then pay back after selling your current house, making it an incredibly easy and convenient way to help people afford a new home without having to risk selling theirs first.

Alongside purchasing a new property, bridging loans are also commonly used for other short-term ventures such as property development, paying a tax bil and social matters such as divorce settlements.

2 Types Of Bridging Loans 

There are 2 primary types of bridging loans that you can choose to take out which will depend on how much you are intending to borrow, and how sure you are that you will be able to repay the money by a certain date. 

These types of bridging loans are:

  • Open Bridge Loan – These have no set end date and can be repaid anytime your funds become available. While they will usually give the borrower up to a year to pay back the amount, this can be extended depending on their current financial situation.
  • Closed Bridge Loan – the more popular of the two and the loan people looking to buy a property will usually take out, the closed bridge loan has a fixed date of when the loan needs to be paid, making it very quick and convenient.

How To Choose Which Type Of Bridging Loan To Take Out

The main factor that should help you decide what kind of bridging loan you should use is how sure you are that you will be able to pay back the fixed amount by a certain date.

Out of the two, the closed bridge loan is far more convenient and won’t have you paying back in instalments over a longer period, which can make it far easier to manage. 

What Is A Bridging Loan (1)

If you’re looking to use this loan to buy a new property, it is therefore important to evaluate the worth of the property you are selling since this will give you an accurate estimation of if you will be able to pay back the bank immediately, or if it will take some more time. 

You should also choose based on if you have a mortgage on your property or not since this will affect how much you are actually eligible to borrow.

Speaking of how much you want to borrow, depending on if you want a small or larger loan should also influence your decision since while bridging finances can vary anywhere from £5,000 to over £1 million, it’s important to know how much you’re realistically going to need. 

If you just need a few thousand pounds to “bridge the gap” and allow you to pay a deposit on a new house, and you know that your old property being sold can cover that, then the regular closed bridge loan will be the much better option.

If however you need some extra money for a house, but your old property won’t cover the amount you borrow, or if you wanted to stretch this loan into your first month or two of living in a new property so that you can get back to your feet financially, then an open bridge loan will be the better choice.

Are There Any Negatives To Taking Out A Bridging Loan?

While bridging loans are incredibly handy and efficient in short-term ventures, there are still a few drawbacks that you should consider before taking one out, specifically the fact that if you cannot pay back, you can end up losing assets such as your home, so there is a high risk associated with it. 

They also commonly come with high-interest rates, and the fees can also add to the high cost since the borrower will be required to pay a set-up fee which usually constitutes around 2% of the loan amount. 

Summary

If you’re looking to buy a property and need financial assistance before you sell an old home, a bridging loan might be exactly what you’re looking for, just always make sure to check the value of your property first before taking one out from the bank.

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