How Do Bridge Loans Work?
Bridge loans are short term loans that are taken out by a borrower against their current property to finance the purchase of a new property. These loans are designed to bridge a gap between a debt coming due. They can also simply act as a short-term loan in pressing circumstances. Bridging loans offer people short-term access to money at a high rate of interest.
Bridging lenders have increased in the market since banks have become more reluctant to lend. Rates can be significantly high and they are aimed at landlords and amateur property developers.
There is a growing trend among borrowers whereby bridge loans are favoured because banks are taking longer to process applications for larger home loans. These individuals are also using bridge loans as a simple alternative to mainstream lending. They may use the loan for short-term financial emergencies, such as paying for a medical bill, or for school fees or for an unexpected repair cost.
This form of financing is essentially money in advance.
If you have funds that are due to you from a property transaction or a pension or provident fund, you can get bridging finance to help you settle debts. Individuals who have been fired or who have resigned or those who have been retrenched often have to wait for a while before getting access to their pension or provident fund.
When applying for a bridge loan you need to be able to prove that you will afford to repay the loan.
Business owners can also rely on bridging loans to help them finance working capital needs. Lenders are usually only willing to provide funding to businesses that have firm contracts (orders) from their clients. These loans are short-term (up to 12 months) and may be backed by some form of collateral.