A Comprehensive Guide On How bridging Loans Work
Do you ever find yourself in a situation where you desire to purchase a property but lack the necessary funds? Many individuals experience such situations. Fortunately, bridging loans were created to address this gap and allow you to acquire the property of your choice.
When purchasing a property while simultaneously selling another, it can be challenging to coordinate the dates to ensure both transactions are completed on the same day. Additionally, if you are participating in an auction and cannot prepare the funds in time, this can create further obstacles. Although risky, a bridging loan UK can be utilised in such situations. This type of loan allows short-term financing to bridge the gap between selling one property and purchasing another.
If you are unfamiliar with this financing option, stay tuned for today’s discussion as we delve into all the details of bridging loans.
Bridging Loan Explained?
A bridging loan is a temporary financial bridge between you and your desired property. Due to its user-friendly application process and quick access to funds, it is becoming increasingly popular. Unlike traditional loans, which can be time-consuming, a regulated bridging loan offers two options: if you require immediate cash, this type of loan is ideal; if you don’t need funds right away, you can pursue the conventional loan application process.
What Are The Types Of Bridging Loans?
Bridging loans come in two variations:
- Close bridging loans
- Open bridging loans.
When applying for a fast bridging loan, you will be presented with these two options, and you can select the one that best suits your needs. Alternatively, you can discuss the terms and conditions with your lender to determine the best option.
Open Bridging Loans
With an open bridging loan, the borrower cannot be given a specific deadline by the lender for repayment, making it a preferred option. However, this does not imply that the borrower has unlimited time to repay the loan. In most cases, open bridging loans must be repaid within one or two years, with the specific terms and conditions being determined by the lender. Discussing the loan conditions with your lender and requesting necessary flexibility is advisable.
Organisations like Kuflink can facilitate the loan process by linking borrowers with suitable lenders. When borrowers have a strong repayment and investment plan, it increases the likelihood that lenders will feel secure in providing the loan.
Closed Bridging Loans
A closed bridging loan has a specified repayment period during which the borrower must repay the full amount. This type of loan is ideal for individuals who prefer a shorter repayment period and want to repay the loan promptly. Choosing between the two types of bridging loans is optional and depends on the borrower’s preference and convenience.
Pros and Cons Of Bridging Loans
Every type of loan has advantages and disadvantages, and bridging loans are no exception. Here are some of the benefits and drawbacks you must consider:
Pros
Bridging loans offer several benefits, including:
- Quick access to funds, which can help keep your business on track.
- The ability to provide a substantial amount of money.
- Short-term loan periods can be helpful if you only need financing for a brief period.
- An easy application process that is easy to complete.
- The ability to secure the loan using valuable assets.
- Flexible repayment and it can be tailored to suit your needs.
- The ability to discuss loan terms and conditions directly with your lender for added convenience.
Cons
- When applying for a bridging loan, lenders typically require the borrower to provide a valuable asset as collateral to secure the loan. It provides the lender with a backup plan to recover their losses if the borrower cannot repay the loan.
- Bridging loans often come with a higher interest rate than other loans.
- Additionally, there may be fees associated with registering the loan, which should be considered when assessing the total cost of the loan.
How To Take Out A Bridging Loan?
Getting a commercial or residential bridging loan is a straightforward process that involves a few simple steps. First, finding a reputable organisation that can connect you with authentic lenders is essential. Once you have enrolled, the organisation will arrange a meeting with a suitable lender.
Before meeting with the lender, creating a complete investment plan, including a repayment strategy, is advisable. It will help you present a comprehensive roadmap to the lender and increase your chances of getting approved for the loan.
During the meeting, you can discuss the terms and conditions of the loan and request that they be made more flexible. It is important to remember that a valuable asset must be secured to obtain this type of loan. The lender may assume property ownership if you cannot repay the borrowed amount.
Why Is the Interest Rate Of Bridging Loans High?
As mentioned earlier, since a bridging loan is a short-term loan, the lender generally charges a high-interest rate. Another interesting feature is that you can borrow up to 75% of the value of your asset. This type of loan involves peer-to-peer lending, meaning you can contact your lender directly.
Once you apply, the required funds will be available within a few hours, and you will be required to repay the full amount within the given time. Due to the short-term nature of the loan, the lender charges a high-interest rate to recover their investment before the given time. If the borrower cannot repay the full amount, they will be charged additional interest to compensate for the delay.
Conclusion
A bridging loan can be an excellent solution for those looking to acquire a property quickly but lacking the necessary funds. With its straightforward application process, flexible repayment options, and quick access to funds, it’s no wonder that bridging loans are gaining popularity. However, it’s crucial to consider the higher interest rates and associated fees before deciding if this type of loan suits your financial situation. Research, discuss terms and conditions with your lender, and have a solid repayment plan to ensure a successful borrowing experience.
