Bridge loan financing is a type of interim or short term financing generated to provide temporary financing to bridge the gap between two more permanent forms of financing.
Bridge loans are most commonly used to fund the purchase or renovations of real estate properties. While there certainly are benefits to bridge loan financing, there are also several drawbacks that you must be aware of before taking out or pursuing a bridge loan. Below are brief discussions of the pros and cons of bridge funding.
Pros of Bridge Funding
One of the best benefits of bridge loans is that the financing that it offers is strictly short-term, unlike loans that are geared for long-term expenditures, like college tuitions or mortgages. Long-term loans require you to pay over a long period of time until you completely pay off the loan. In this scheme, it is more likely that during the period of time, you may suffer some form of financial problem that can affect your ability to pay the loan off. This can compound your financial problems more as the penalty fees increase as you struggle to get alternative sources of funds to cover the mounting debt. On the other hand, bridge loans are designed to be repaid in full by the time that a long-term form of financing is acquired or available and secured.
One other major benefit of bridge loan financing is your ability to choose among repayment options. Bridge loan financing lets you choose if you want to repay the bridge loan before or after securing a more permanent form of financing. If you choose to repay the bridge loan completely before securing a permanent loan, and are able to do so, you can benefit from it because your credit rating will significantly improve. This will allow you to qualify for a long-term loan that you would otherwise not be eligible for. If, on the other hand, you choose to pay after, you can get a portion of the permanent funding in order to repay the bridge loan in full.
Cons of Bridge Funding
The biggest benefit of bridge loans is actually also its biggest disadvantage. Because it is short-term and meant to be paid more quickly compared to a long-term loan, it entails bigger regular payments. The lender may also not be flexible when it comes to late payments because of the length of the loan. Since it is short-term, late payments would incur larger fees and penalties. If you are unable to give the regular payments, you may want to look for alternatives to bridge loan financing.
You may opt to pay the bridge loan in full once you get permanent financing; however, the loan incurs interest for all the months that it isn’t paid.
It also relies on the availability of a more permanent financing. Because it entails large regular payments and great interest if you are unable to pay, it may get more difficult to pay, leaving you with a worse financial situation than what you started with.