Getting money to fund different projects or cater to urgent expenses can be challenging in today’s world. For instance, you want to buy a home, but you lack enough funds because you have not gotten a buyer for your current property. Traditional bank loans can take some time to get processed, which can be a recipe for stress. However, you do not have to panic because bridge loans help out in such situations. Follow through to understand what this kind of funding is all about.
Define Bridge Loans
These are short-term loans that you can acquire to meet an urgent financial demand until you get permanent financing or cater to the urgent obligation. This type of financing provides immediate cash flow before you secure permanent financing. Although they are used in businesses, these loans are most common in the real estate industry. As the name suggests, bridge financing creates a ‘bridge’ between short-term financial needs and long-term loans.
Types of Bridge Funding
There are four main types of bridge loans tailored to cater to different consumer’s needs. These types are;
First Charge
The lender gets the first charge over the property. This means that if you default on this loan, the lender will be paid first before any other loans you might have acquired.
Second Charge
This option has a higher interest rate than the first charge because there is a higher chance of default. In this type of bridge loan, the lender gets the second charge over the property after the existing first charge lender has been compensated.
Closed
Chances of default on this type of funding are minimal because the lender and the borrower agree on a predetermined time frame for the loan repayment. That is why it comes in at a low-interest rate.
Open
This is the opposite of closed bridging loans, whereby the repayment period is undetermined during the initial inquiry. For this reason, open bridge loans come at a higher interest rate because of the uncertainty of loan repayment. The best way that lenders deal with that is by deducting the interest rate from the loan advance.
Bridge loans have been a life-saver for many people, especially in the real estate sector. Do not be left out or stress over short-term financial requirements because there are several companies offering bridge loans.