A bridging loan is a short term loan which is taken for a span of around 2-3 years while one waits for a lager or longer term finance. Such loans are usually used as a last resort since these kind of financing are given at a higher rate of interest for the lender of the loan is at a higher risk. But in times when one needs immediate cash or is facing financial crises, such loans come as a sigh of relief. They are also called caveat loan or in some applications swing loans.
What a bridge loan is?
A bridge loan is a middle financing obtained until the permanent or the long term financing is obtained. The cash obtained from the new loan is used to pay back the short term loan obtained, as well as to meet the capital needs for the net stages. These loans not only have a higher rate of interest but also points and other costs that are liquidated gradually over a shorter period. The lenders also require a lower loan-to-value ratio. Despite of these disadvantages, these loans are used because they are arranged quickly and do not require to fill a number of forms and provide all types of documentation.
Bridge loans may be of 2 types:
• Open bridging loans: These kinds of loans have no payoff date but the taker of the loan may be required to have paid some amount after a certain time. These loans are apt for those who have found their ideal property to buy but have not yet put their existing home up on the market for sale.
• Closed bridging finance loans: Such loans are available for a predetermined time frame. They are given only to buyers of homes who have bought their new home in exchange for the existing loan. Hardly any of these exchange deals fall through so the lenders are happy to offer closed bridge financing loans.
Other ways of classification:
The loans can also be classified on the basis of the interest rate. Some lenders may charge a higher rate of interest in comparison to others but these are able to provide the finance earlier too. It depends on the need and circumstances of the buyer to choose the kind of loan the person would prefer to take. If one is confident that the sale will go through in a matter of weeks, then a loan with a lower arrangement fee is preferable. On the other hand if the condition is such that the bridging may be required for many months then the loan becomes a smaller part of the overall cost.
Hence these kinds of loans are the saviors in times of distress and prove to be a boon when one needs immediate cash for any kind of investment which may be in danger of falling through if the financing cannot be arranged within the given time frame. Hence in such circumstances a bridge loan is the only one which can provide immediate relief from worry.
This article is related to the concept of obtaining a bridging finance, the associated benefits and risks. It mainly focuses on the cases where these kind of loans are helpful and the reason of their demand.For More Information Visit : http://www.cpa-asp.com/