Cash Gap? Use a Short-Term Bridging Loan to Bridge It
Recently updated on January 16th, 2023 at 02:37 pm
Do you need a short-term loan to bridge the cash gap? If so, a bridging loan could be worth considering.
Learn more about what bridging loans are and how they can help.
What is a bridging loan and how does it work?
A bridging loan is a type of short-term finance that ‘bridges’ the gap between two financial transactions. It can help you cover unexpected expenses or make a large purchase. For example, if you are in the market for a new home or a new commercial property and you find something that is perfect but you haven’t yet sold your existing property, then a bridging loan can help to ‘bridge the cash gap’ until you sell your old home or any other property. In this instance, a bridging loan can be used for a deposit on the new property.
Bridging loans are typically only available for a short time, usually up to 12 months. Despite having higher rates than a traditional mortgage, they can be a useful option if you need to access funding quickly and are confident that you will be able to repay the loan within the specified timeframe.
Benefits of a bridging loan
Taking out a bridging loan can have some benefits, such as:
- Bridging loans usually have a quick and easy process.
- Bridging loans can be used for a variety of purposes, including home purchases, renovations and business expenses.
- Bridging loans are known to have competitive interest rates compared to other types of short-term loans.
- Bridging loan repayment periods can often be extended, if necessary.
Risks of a bridging loan
Whilst the bridging loan offers several benefits, there are also some risks involved:
- Interest rates are typically higher than traditional loans.
- Applicants usually need to provide collateral to secure a loan (i.e. property).
- As with all loans, your credit rating can be affected if you are unable to repay the loan within the specified timeframe.
- You may have to pay early repayment fees if you pay off the loan before the end of the term, though this varies between lenders.
Bridging loans vs traditional loans
Bridging loans differ from traditional loans in the following key ways.
- Bridging loans are typically shorter in the term, with most loans being up to 12 months. This shorter repayment timeline can be helpful for borrowers who need access to quick cash for a specific purpose, such as closing on a new home before their current one sells.
- Bridging loans usually come with higher interest rates than traditional loans.
- Traditional loans are typically taken out against a property that already exists, whilst bridging loans can be used to finance the purchase of a property that is still under construction. For this reason, lenders will often require additional collateral when issuing a bridging loan.
Is it easier to acquire a bridging loan than a traditional loan?
Bridging loans are renowned for being quicker and easier to obtain versus a traditional loan. With a traditional loan, you have to go through a lengthy application process and then wait for the approval of the loan. This can take weeks or even months.
On the other hand, with a bridging loan, you can usually get the money you need within a few days.
How to decide if a bridging loan is right for you
Before taking out a bridging loan, there are several important things to consider, including:
- Your financial situation: Do you have a solid plan in place for repaying the loan and can you comfortably afford the monthly repayments?
- Purpose of the loan: What do you need the money for and is a bridging loan the most suitable option? A finance broker can help you with this decision.
- Terms of the loan: What are the interest rates and repayment terms, and most importantly, are you comfortable with them?
- Credit history: Your credit rating will affect your ability to get a loan and the respective interest rate.
What happens if you default your loan?
Defaulting on a loan is a serious matter. If you are struggling to make the repayments, it is important to contact your lender as soon as possible to discuss your options.
If you default on your bridging loan, you will usually be charged late payment fees. Worst case scenario, you could lose your collateral, which is usually a property (meaning that the lender can take possession of the property and sell it to repay the loan).
As with all loans, consider your needs and financial situation before taking out one. Bridging loans can be a useful tool in certain situations, but they are not right for everyone. If you are not sure, speak to a financial advisor for more information.
If you’ve decided that a bridging loan is right for you, Mango Mortgages can help. We offer a range of short-term finance options to suit your needs and can help you get the funding you need quickly and easily. We also have an experienced financial and fund management team who can help you make the right decision for your situation. Apply online here.