As the term suggests, a bridge loan is designed to fulfill the financial needs of the individuals or the companies at a temporary basis. These loans are also termed as swing loans. Generally these loans are offered for a term of maximum three years and the interest rates that are offered for the bridge loan remain between 12%-15%.
The bridge loans are very helpful for meeting different financial needs of a business that need to be fulfilled immediately. At the same time, these loans are also availed by the individuals for the same purpose. The long-term or personal loans need some time for approval and at the same time, there are several requirements that should be fulfilled by the borrowers in order to get these loans.
The bridge loans charge more interest rate than the ordinary long-term loans. There are several other costs also that are responsible for these extra charges. At the same time, the higher risk that the lenders face are also responsible for the higher interest rates of the loans. Because these loans are approved very quickly, several verifications regarding the income source and credit history and so on are not done here and so the default rate of these loans is also very high.
On the other hand, the bridge loan lenders sometimes offer low amount against a collateral of higher value. There are certain reasons behind this. Now, if the borrower needs more money, then some extra security or cross-collateralization is essential and should be placed along with the original collateral.
The bridge loans are used in the real estate sector for a number of purposes. These loans are used for taking advantage of a favorable market. When the property market is low, the investors put their money and waits for the market to rise. On the other hand, these loans are very helpful for saving incidents like foreclosure. For these purposes, there are the traditional mortgage loans but processing of such loans takes some valuable time and so the bridge loans are the best options in these situations.
The terms and conditions of bridge loans and hard money loans are almost same but the features of these loans are not same. The basic difference between the two loans is that the hard money loan represents a particular source from where the loan has originated. On the other hand, the bridge loans represent the tenure of the loan.
Last Updated on : 1st July 2013