How does the bridge loan work?
In the real estate sector, a bridge loan is utilized to pay for a new home. You have two alternatives as a house owner who wants to acquire a new house.
A contingency is the first choice to add to the contract for the home you plan to purchase. The contingency would indicate that when your old house has been sold, you will only buy the house. However, a certain seller might not be eager to acquire the home quickly if other ready purchasers are willing.
The second alternative is to receive a loan to cover the house down payment before the first house is sold. A bridge loan may be taken, and you can utilize the old house to guarantee the loan. The revenue can then be utilized to pay the new house down payment and meet the loan charges. In most situations, the lender provides the aggregate value of both properties with a bridge loan amounting to about 80%.
Companies and business owners may also receive bridge loans to fund work capital and pay costs in anticipation of long-term financing. You can utilize the bridge loan to cover the cost of services, wages, rent, and stock. Disadvantaged companies might also seek bridging credit to maintain the company’s smooth operations while searching for a major investor or buyer. In order to safeguard its interests in the firm, the lender may then take an equity holding in the company.
Application for a Bridge loan
Every citizen may apply for this loan. You must be at least 21 years old and not above 70 years old. You must be the legal owner of the property or company.
- Loan quantity
The size of the loan must be determined mostly based on the borrower’s capacity to repay. A borrower with a strong loan score can get loans of up to 80% of the project value. Under the existing bridge loan programs, the maximum loan amount will be up to Rs. 2 crores given by some banks.
- Interest rate
The prevalent bridge loan interest rates vary from 12% to 18%. This loan is to be paid by the borrower. The amount of loans normally varies between 0.35% and 2%. This loan does not have an advance payment penalty.
- Tenure for repayment
These are usually 12-month short-term loans. However, it can be prolonged up to 2 years, depending on the client profile and the discretion of the bank. You can get a maximum of five years’ payback term.
- Some Bridge Loans Disadvantage
Although bridge loans offer rapid liquidity solutions, you are also disadvantaged. First, for such short-term loans, interest rates are rather expensive. The second key aspect is that these loans are made on the basis of future claims. You will be left with an enormous debt if it fails. In order to minimize the high-risk element, it would be wise to go for a personal loan that is far more flexible than a bridge loan.