A bridging loan is a good choice if you need short term finance before a larger loan can be obtained from a lender. Bridging loans are also known as swing loans or caveat loans. They are obtained when bigger amount of a loan is temporary not available. A bridge loan is obtained for a short period of time from two weeks to three years.
The biggest advantage of this type of a loan is the speed and its getting. Suppose you need to pay cash down payment on your new house within a short period of time. In such situation you don’t have an opportunity to wait going through complicated paper work to get the cash. The bridge loan is the best solution for such situations.
Usual types of loans have strict rules that must be followed. Bridge loans can be obtained with little or no documentation. However, this might have risk because interest rates are quite high, beside additional costs. The additional charges and high interest rate make risk for the lenders. Lenders providing bread loans often ask for secured advance and a lower loan to value ratio as well. That’s why it’s recommended to think carefully before getting the bridge loan.
Interest rates for such loans are usually between 12 to 15% for 12 month term loans. For commercial properties to value ratio won’t be more than 65% while for residential properties it won’t be more than 80%, calculated on basis of assessed value of specified property.
These loans can be of open and closed types. An open bridge loan has no fixed term within which it must be paid back. This involves greater risk for the lender, because this type of loan will have a higher interest rate. However, a certain date is established since when regular payments towards paying back the loan must start. A closed bridge loan has a fixed period within which the loan must to be paid back. This type of loan has lower interest in comparison with the open bridge loans.
These kinds of loans have much in common with hard money as both are non-standard high risk loans that are applied for in times of financial crisis. Hard money loans refer to source of the loan which may be private individual, private company or an investment pool. Banks do not offer such loans. Bridging loans on the other hand refer to the duration of the loan.