A lot of people in business and in the corporate world have no idea what a bridge loan is. It is vital that you get to understand what this type of a loan entails, and when you should consider taking it. This loan can save you from a tight financial position, but can also get you into a financial mess if you do not plan properly or if your plans fail to live up to your expectation. The loan is especially good for businesses with Invoice factoring since you can get the money you need urgently and pay up later when your clients have settled their invoices. Here are three things you need to know about these loans.
1. Temporary Loans
Unlike other loans, bridge loans are temporary loans that you take to settle urgent financial matters as you wait for your long-term loan to mature. The term bridge connotes the time or gap between your existing loan and another. Bridge loans come in between to ensure that your project keeps running or to enable you to make a down payment for your new home before you can sell your old home. If it is in business, this loan acts as an emergency funding secured by invoices that you expect clients to settle at a later date. When buying a new home and don’t have any capital, you can take this loan against your old home, make a down payment for the new one, then settle the loan once you sell the old home as you clear the balance for the new.
2. Strict Requirements
Bridge loans carry more risk than other loans. In most cases, borrowers use an existing asset or another loan to secure this temporary loan for an urgent matter. It is never a guarantee that you will sell your old home on time or that your expected loan will mature within the set date. Hard money lenders will often look into your tax returns, credit score, and your income to determine if you are eligible for this loan. If you have a low credit score or the lender sees that there is no financial sense of you getting the loan, then you can easily be denied owing to the risks involved. There are times when borrowers find themselves paying a mortgage on their old and new home and at the same time making interest payments for the bridge loan. It is such scenarios that lenders try their best to avoid.
3. They are Expensive
One thing you should put in mind is that bridge loans are a bit more expensive than other loans. Since they are emergency funds to be paid on a short-term basis, they accrue a higher interest than other loans. You will also have to pay some fees which in the end might prove to be very expensive especially if you do not have an income. Owing to this, lenders often require borrowers to be in a position to own two home at the same time to qualify for this loan. This qualification is an indication that you can comfortably pay high interests and fees.