What is a Bridging Loan?
A bridging loan is a loan taken out to literally bridge the gap between paying for a purchase and waiting for funds to come in from a sale of another asset. A bridging loan will often be used by someone buying a property who has to wait for the proceeds from the sale of another property to come through before they can fully fund the purchase. Perhaps the most important thing to note when considering the option of a bridging loan is that it is a secured loan, meaning that the lender must have a high value asset such as land or property to put up as collateral. The different types of bridging loan  There are two types of bridging loan  an open bridging loan and a closed bridging loan. These two types of bridging loan operate in the following manner:  Open bridging loan  An open bridging loan doesnt have a specific end date and can be repaid as soon as the funds become available. Within these parameters open bridging loans generally run for a year and occasionally longer. Closed bridging loan  A closed bridging loan comes with a fixed end date. Loans of this kind are usually based around the date on which the borrower knows they will be able to pay the amount back, and they are generally short term, lasting only a few weeks or months. As a rule, open bridging loans come at more of a cost than closed bridging loans, reflecting the fact that they offer more flexibility for the borrower. Whether opting for an open or closed bridging loan, you must ensure that youll definitely have the means to repay the money borrowed when the time to do so comes. Choosing the bridging loan thats right for you  When shopping around for the right bridging loan its important to weigh up the following factors. The amount you need to borrow  The value of the asset youll be putting up as collateral  this will have an impact on the amount youre able to borrow. The length of time it will take you to pay the bridging loan back  If your bridging loan is secured against a property that is still mortgaged, it will have an impact on the amount that can be borrowed. If youre using a property as security against the loan then the lender will add a charge to that property. This measure sets the priority of debts if the loan cant be repaid. If the property in question has to be seized and sold off in order to pay back outstanding loans then a first charge loan will take priority over a second charge loan. If the bridging loan is the first loan secured against your property then it will be a first charge loan. If you already have a mortgage on the property or have taken out another loan against it then the bridging loan will be a second charge loan. Bridging loan interest rates  The interest rates charged on bridging loans tend to be relatively high and will vary from lender to lender. The short-term nature of the loans means that the interest rates are charged on a monthly basis, rather than as an annual percentage rate (APR). The three most common methods of charging interest on bridging loans are:  Monthly  you pay the interest each month and it isnt added to the bridging finance. Deferred  there are no monthly interest payments, instead all of the interest falls due at the end of the bridging loan. Retained  the interest is borrowed for an agreed period and then paid back at the end of the bridging loan. Other fees charged on bridging loans might include an arrangement fee, an exit fee if the loan is paid back ahead of time, legal fees and valuation fees. The pros and cons of bridging loans  Pros  The application process is generally quick and simple, the terms can be flexible, it is possible to borrow large amounts of money and approved bridging loans are paid quickly. Cons  The high level of fees and interest rates charged is high, and if the loan is secured against your property then you run the risk of losing that property if you find yourself unable to pay the money back. We can help  Understanding the opportunities and risks presented by bridging loans may help you to maintain the cash flow of your business, and the experts at GoCardless can explain exactly how they work. The same applies to the help we can give with ad hoc payments or recurring payments.