Bridge loans are an easy way to look for in case you are looking
for fast cash. Bridge loans are short-term loans that can be
taken by either a company or any individual. These loans are
usually available with commercial banks or conventional banks
also. These loans need to be secured by some form of collateral
like a real estate property, receivable accounts, inventory
or any fixed asset.
When a company takes a bridge loan the funds are secured by stocks or they would give some shares at discount price to the underwriters for getting the loan amount. Usually the amount that can be obtained by abridge loan does not exceed 65% of the value of the property.
As indicated by the name the bridge loans are meant to gap the time to receive
a loan. It acts as a bridge for the borrowers next financial
transaction. These Bridge loans
are quite common especially in the real estate market. Prospective
homebuyers who are willing to buy a house but have not sold
their present house as yet generally use these loans. With the
help of these loans they can arrange the money for down payment
for paying for the new house or can also be used to pay off
the mortgage on the present house.
Basically there are two types of Bridge loans.
With the first kind of bridge loan you can make a down payment
for the new house or pay off the mortgage on the existing house.
With this there are no monthly payments made to the bridge loans
but monthly payments are made towards the new house and once
the old house is sold the balance on the bridge loan with the
interest is paid off.
In the second type of bridge loans money is taken against the equity in the current house and the amount is used for making the down payment for the new house. The bridge loans acts in the same way as a mortgage loan. With a mortgage loan the amount that is borrowed is secured by the house nut the interest rates on the mortgage loans are lower than that on the bridge loans.
The bridge loans are supposed to be paid back within 90-120 days but the repayment term in some cases may also be extended to 6 months or 1 year. These are short-term loans used to meet the immediate financial needs of a business, individual or even at times government till they get a permanent financing option. These loans are also termed as Gap financing, Swing loans or Interim financing,
In case of a business the amount that is obtained with the bridge loan can
be used to secure the
working capital till the time a proper finance option is found.
These loans can however be risky to the consumer, as they have
to be paid back in a short period of time. The interest rates
on these loans are higher as compared to any other loan. This
makes the bridge loans costly when compared to the loans obtained
for traditional financing. The interest rates vary from 12-20%
and the loans also charge legal fees, appraisal charges, underwriting
or application fees and the environmental costs. Besides this
there are various additional costs like the Feasibility Study
Charges if the loan is taken for the purpose of development
or construction. There is an also up-front fee that is non-refundable.
There are several advantages of taking a bridge loan. These include competitive interest rates. There are various lenders that offer bridge loans and you can get some very good offers. The loan is given out only when there is a confirmed source of repayment. In case you make the payment towards the loan before the due date there is no pre-penalty charged on the loan. The loans available are used to meet the immediate needs till any other source of financing is got. The bridge loans can either be taken as lump-sum amount like personal loans with the interest rate being fixed on the loan and you can have an option of repaying the whole amount at one time at the maturity of the loan. You can also have the option of interest-only payments.
As no loan option is perfect the bridge loans also have some disadvantages. When taking a bridge loan you should know that the interest rates on these loans are high. These loans can be a risk for the borrowers credit history. At times the lender may charge a pre-payment penalty in case if he looks for a specific yield and the borrower pay off the loan earlier. There is no guarantee that the bridge loans may become a permanent distribution option for you.
The repayment terms for a bridge loan vary from one person to another besides it would also depend on the amount of loan that is taken and the terms of the loan that are mentioned previously. But when taking a bridge loan the borrower should payback the loan as soon as possible. If not so the interest on the loan amount accumulates and can be difficult to pay back. During the loan repayment term the borrower is required to pay only the interest on the loan and once the property is sold the balance can be paid off. If the house is sold off within the term limit then the undeserved interest is given back to the borrower.
Before the borrower takes a bridge loan he should be aware of his financial
condition and should be sure enough that he would be able to
pay back the loan on time. When taking a bridge loan you should
shop around and look for offers from various lenders. This can
help you get better options. The Bridge
loans are given out quickly but in some cases when the
loan amount is more it can take time for approval.
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