Bridge Loan basics: Financing short-term obligations


Bridge loans bridge the gap while loans are being secured. Image: Flickr / 96dpi / CC-BY-SA

Though the term comes up most often during real-estate transactions, bridge loans are becoming more popular for many reasons. Bridge loans are relatively simple to understand. Like most financial products, however, the details are what can make a bridge loan work out — or not.

Bridge loan basics

A bridge loan began as a form of short-term financing for high-dollar real estate loans. A bridge loan is a high-value, higher-than-standard-interest loan that amortizes (is paid off) very quickly. Bridge loans are made with the understanding that further, longer-term financing will be secured and used to pay off the amount of the bridge loan as soon as possible.

The benefits of bridge loans

Bridge loans provide short-term, fast cash flow for home buyers, businesses and individuals who need to bridge a financing gap. The benefit of this is that buyers or businesses are provided with the cash they need to meet obligations more quickly. For home buyers, it means being able to purchase a new home before the original home is sold. For this reason, bridge loans are becoming more popular as the economy recovers and credit markets open back up.

The drawbacks of bridge loans

Bridge loans come with a lot of risks. The loans have high interest rates because the risks associated with the loan are much higher. These loans usually require more collateral than the loan itself is worth. Bridge loans usually mean that the person with the loan will own two homes, and may be paying on up to three loans at once.

Bridge loan basics and personal finances

For home buyers who are looking to move quickly or businesses waiting on financing approval, bridge loans can make it possible. Everyday borrowers who do not have the capital to own and maintain two homes while they wait out a sale may end up digging themselves into an even deeper hole with a bridge loan. For startup businesses or home buyers with equity to spare, a bridge loan can be the short-term financing they need. If you do decide that a bridge loan is right for you, treat the loan the same you would any other — carefully consider interest rates, terms of repayment and cost over the life of the loan.



  2. Investopedia