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Could a bridging loan be right for you?


This article is here to explain what is meant by a bridging loan, how they can be used and help you to decide if they are the right option for you.

The term bridging loan is used to describe a short-term money solution, often used to finance a substantial personal or professional purchase while a longer-term finance solution is sourced.

Bridging loans are a true example of a short-term finance option. They are simple to organise and are extremely flexible lasting from anything between a couple of years to just several days; applicants often find they receive funds in just 24 hours.

Their versatility and short applicationtime,mean this finance option can provide a resolution to money difficulties for both private borrowers and businesses; however, it is important to remember that despite their flexibility,bridging loans are not always the best option out there.

It is crucial to consider the cost implications of thebridging loan accessible to you and evaluate your financial status from a variety of angles, before submitting an application, not only for a bridging loan; but also for any form of finance you are hoping to source.

What can you use a bridging loan for?

Whether you are borrowing to finance a business or private purchase, bridging loans are only an option worth undertaking in specific financial circumstances; it is key to ensure your case is right for this source of finance. That said, bridging loansare commonly supplied by specialist businesses and a plethora of situations can be considered and provided for.

Frequent purposes for bridging loans include funding for:procuring a new home until your current house is sold, securing a home while you await a mortgage, extending or renovating an existing property with an intention to re-mortgage or sell, purchasing a property at auction, settling a tax debt, funding a business start-up, paying business invoices whilst experiencing cash-flow difficulties, a divorce settlement, the extension of a lease and even to refinance an existing bridging loan.

What type of bridging loan could I be eligible for?

There are two types of bridging loans, these are referred to as open and closed.An open bridging loan means your main source of finance has yet to be secured, open loans pose a greater risk to both the loan provider and yourself they are therefore harder to obtain and more expensive.A closed bridge loan is available to those with a pre-agreed means of repayment, such as a homeowner who has already exchanged. These loans are regarded as lower risk and are therefore easier to procure and offer more competitive rate.

What do bridging loans cost?

Bridging loans are only designed to cover short-term money deficits, they are therefore charged at a monthly rate of rates upwards of 1%. This greatly exceeds the higher annual rates than a standard mortgage, which is why they're not viable as a long term borrowing solution.

Both the loan amount and the length of the loan will affect the interest rates you're charged, as will the asset used when securing the bridging loan. Finally one-off charges such as arrangement fees, legal fees plus and in some circumstances exit fees will be applied.

Are bridging loans reliable?

The financial services authority regulates some bridging loan lenders, but not all. However that doesnít mean the sector is unsafe. The real risk of any loan, including a bridging loan is dependent on your individual circumstances, and not the loan itself. If a long-term finance option is not secured before the bridging loan is taken out, any hiccups in securing long-term finance for the future could leave you in a tricky predicament.

However it is wise to remember that all bridging loans are secured, this involves tying an asset to the loan, the asset value will vary dependent on the amount borrowed, however assets commonly used to secure bridging loans include a property or vehicle; if repayments are defaulted, the asset may be lost.

Finding the greatest deals on bridging loans

With considerable start up costs and costly monthly rates that have exceeded 10% per annum, itís important to maintain as low a cost as possible.It is crucial to keep in mind the short term nature of bridging loans results in high set-up costs which regularlyrun into thousands of pounds; this can effectthe priceof the finance compared to the interest rate on the loan itself.

It is important to know the amount you can afford to pay back each month on your desired borrowing amount and research the most competitivebridging loan rates to establish which providers match your budget - and over what period.

Bridging loans are most inexpensive when they are repaid promptly; repaying them in full once your projectís main cash source becomes available to you is desirable. This means aiming to agree as far in advanced as possible a more long-term source of finance before applying to take out a bridging loan this will reduce amount of time you need to borrow for and therefore the cost implications for you or your business.


Please Note: is not authorised to give advice under the Financial Services and Markets Act 2000.

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