Information about a Bridging Loan

A loan that helps people to borrow money on a collateral, for a short period of time is called a bridging loan. Technically, a bridge loan can be obtained on any type of tangible collateral but in practice, these types of loans are exclusively granted on collateral of property. The property can be residential (both personal residence and rented out properties) or commercial. The general trend with people who apply for bridging finance is to obtain immediate funding for the purchase of a new property, while their old property is still up for sale. They are able to pay back the loan when their old property is sold. Bridge loans are also taken for other purposes but invariably the collateral given for these loans is –property. Apart from individual borrowers, bridge loan is quite popular in the corporate world too. Companies that require immediate but short term loan, opt for the bridging loans. Office expansion, Salary payments, Property lease payments, etc, are some examples of reasons why corporate take the short term bridge loans. Companies usually take their bridge loans on their commercial property collaterals like offices, shops/showrooms, factories, etc. They also make use of their financial bonds and stock holdings as collaterals. Corporate companies also avail bridging loans to invest in short term gains like hedge funds, arbitrages, etc. In spite of the diversity of usages o bridge loans by companies, its usage for purchase of property – residential or commercial, accounts for 80% of the industry size.

Money

Non Commercial bridging loans – those that are availed by individuals, not companies – are of two types, which are “Open” bridge loans and “Closed” bridge loans. Open bridge loans are those that are provided to individuals whose properties are up for sale but have not found a buyer yet. The risk involved with this type of finance I much higher for lenders because there is a probability of the property to remain unsold for a longer duration of time. This can result in a default in repayment from the borrower. So, lenders are not always too keen to offer Open bridging loans to all types of borrowers. The lending terms for these loans are stringent and the interest rates are also costlier. A closed bridge loan is much safer from a lenders perspective. These are loans that are given to people whose properties have already found buyers but the financial and ownership transfer procedures are yet to be completed. The lenders know for sure that the borrowers are bound to receive the monies from the impending sale very soon and the likelihood of them closing the bridge loans without default is very high. Because of the reduced risk, the lenders are willing to relax the loan conditions for closed bridge loans. The interest payments are also lesser for these loans. All types of bridging loans are given for a very short term – 15 days being the shortest and 1 year being the longest. However, some lenders are willing to offer flexibility in the loan periods, provided the borrowers fulfill the stipulated requirements.

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