As the name suggests, bridging loans are short-term loans designed to help you bridge the gap in finances when you have to purchase property immediately. For instance, if you want to purchase a property but you do not have enough funds to sign the agreement because your current property is taking a long time to find a buyer, you can consider a bridging loan.

Bridging loans could be used to invest in properties you already own. You can use the property's equity in order to refurbish your house. However, this is advisable when you know that renovation will help increase rents and sale prices.

Bridging finance is available from lenders and banks. Most of the people think that bridging loans are short-term loans and hence they are manageable. The whole loan is discharged within 12 months. But it does not mean that the loan is cheap. Experts advise that you carefully consider your repayment capacity before using bridging loans.

How much do bridging loans cost?

Bridging loans are expensive because of their short-term nature. You will be charged an interest rate by the month. It means the cost of the debt could go up and down dramatically by a small difference in interest rate. For instance, 1% monthly interest rate is equivalent to 12.7% APR, while a 2% monthly interest rate is equivalent to 26.8% APR. It includes compound interest. Note that this is only interest rates, not additional fees and charges. If added those, APR would be even higher.

The money you pay down every month will not go towards the principal amount. It means you will have to make the balloon payment at the end of the agreement. It could be hard to do so. Make sure that you carefully decide the impact of a balloon payment on your budget. In addition to interest, you will be required to pay down:

·        Arrangement fees

·        Exit fees

·        Administration fees

·        Valuation fees

·        Legal fees and related charges

An exit strategy is essential because it gives you a way out when you cannot repay the debt. If you manage to sell your current property, you do not need to worry about bridging loans. But what if you fail to discharge it on time? In that case, you have an option to convert it into a mortgage. However, while doing so, you must consider your repayment capacity.

Mortgages are not easy to handle. They will tie you to the debt for a long period of time. They can be difficult to repay if your financial situation is turned upside down.

Can you obtain a bridging loan with bad credit?

Getting a bridging loan with a poor credit rating can be quite challenging. This is because you will be perceived as a risky borrower. the cost of a bad credit bridging loan in the UK is relatively high because of the high risk involved. Lenders try to mitigate their risks by charging high interest rates.

While taking out a bridging loan, you will have to pay an upfront amount. It could be between 10% and 20% depending on the loan provider. However, if your credit rating is not up to par, you will have to arrange a larger deposit. Not all lenders provide bad credit bridging loans. Make sure that you have researched so that your application is not rejected on the grounds of a poor credit rating. Compare interest rates within bridging finance providers so that you can choose the best possible interest rates.

Bad credit bridging loans can be challenging to repay. Try to improve your credit score so that you can qualify for competitive interest rates.

Type of bridging loans

There are several types of bridging loans, and each of them is aimed at meeting specific financial needs.

·        Regulated bridging loans

Regulated bridging loans are similar to mortgages and are aimed at those who want to use property for their residence.

·        Unregulated bridging loans

Unregulated bridging loans are aimed at those who want to generate income from the property they are investing in. For instance, you want to use that property to rent out.

·        Open bridging loans

Open bridging loans come with no exit strategy. There will be a deadline, but you do not need a plan for how you will pay off the debt to meet the deadline.

·        Closed bridging loans

Closed bridging loans require exit strategies. It discusses how the loan will be paid back. Having an exit strategy secures the interests of both the borrower and the lender.

·        First charge bridging loans

First-charge bridging loans are those that have the primary charge against the property. Before anything else, a bridging loan will be repaid from the property secured. They provide more security to a bridging loan provider.

·        Second charge bridging loans

Second charge bridging loans could be settled from the secured property when the existing mortgage or loan is paid off. Second charge bridging loans provide security to borrowers.

Ways to secure a bridging loan fast

Here are the ways to secure bridging loans quickly:

·        Consult a broker

While you can connect with a bridging loan provider directly, contacting them with a broker will speed up the process. They will help you choose a provider who tailors their solutions to your needs.

·        Keep ready your documents

You can save your time and effort if you arrange all your documents. Your broker could help you with documentation. Make sure that you have an identity proof and income record, property details, and an exit strategy.

·        Exist strategy

Exist strategy is the most crucial element that a lender would consider while making a decision. If they are sceptical about it or it does not sound so strong and convincing, they will most probably refuse a loan.

An exit strategy defines long-term plans about the payment of bridging loans, such as converting them into a mortgage or selling the property.

Although you are sure that your existing strategy will certainly work, you should ensure that you do not owe other loans, such as monthly instalment loans with no credit checks from direct lenders in the UK.

Having other small loans will complicate things. Your financial situation could be affected badly.

The final word

Bridging loans are short-term loans that can help you when your current property is taking a long time to sell and you want to invest in a new property. They are short-term loans, but you might have to convert them into a mortgage or discharge the debt by selling the property by the end of the agreement, depending on your financial circumstances.

Bridging loans are expensive. You should carefully determine your repayment capacity, so you do not struggle with your payments.