Should you get a bridging loan? Advantages and disadvantages to high interest quick cash.
This fairly new type of lending has become more and more popular in recent years ahead of the 2008 recession. With banks increasingly less likely to lend, these loans have come in handy for home owners and property developers alike, for their immediacy and large sums available. However, with their high interest rates these loans can often come with risks so considering the pros and cons before deciding to take one out is vital in ensuring you make the best choice for you.
What is a bridging loan?
A bridging loan provides a large sum of money fast but with high interest rates. They can be taken out for anywhere between one week and one year and come with rates of around 1.25% a month at their cheapest. While there are often high admin fees these loans can get you a quick short-term mortgage without having to go through various stages with solicitors and banks.
Who benefits form bridging loans
These loans are ideal for people needing a large sum of quick cash and can therefore pay it back quickly.
Landlords who buy to rent benefit from this loan as it can pay for a mortgage on a house quickly and can then be paid back through tenants’ rent.
With its fast processing people who buy houses on auction and renovate can also get a quick mortgage that they can pay back when they sell the house on.
This is the same for people who have bought a house but not yet sold their current one meaning they can pay for the house with the loan and then pay the loan back once they’ve sold their current home.
These loans are fast meaning you avoid the long processes that would usually come with taking out a mortgage. Their speed also comes in handy when you need to buy something quickly and there is competition such as an offer on a house or a business with just a 2 week processing period.
They can also significantly improve your credit score if you pay back your loan on time and can come with open or closed terms meaning some have a fixed period to pay back where as some don’t. As they are high risk, paying back the loan early will work in your favour when it comes to taking out loans in the future.
These loans can save you in difficult financial situations. If you’re house is going to be repossessed a short-term loan can help you buy yourself time if you are confident you are able to pay the loan back.
They essentially make you a cash buyer which gives you an advantage in negotiation towards your purchase. You will have more power in competitive buying situations as you have the money up front and don’t need to go into mortgage deals until you are ready.
These loans are significantly more expensive than other loans and come with high interest repayments. As they offer large sums of money on a short term basis repayment is expected to be fast so rates are much higher than that of a longer term loan.
Bridging lenders are not flexible with late payments and you can be charged high penalty fees if this is the case. You have to be confident in repaying the loan if you are planning to take one out as fees can mount if repayments are overdue making it sometimes impossible for people to be able to repay the loan.
These loans often rely on the borrower being able to get a mortgage from a mainstream lender soon after they take out the loan. If this isn’t possible the borrower can end up with a large amount of debt gathering compound interest while they try to find a lender to give them a long-term loan.
In addition to this if you are looking to take out a loan it is essential that you compare the different deals on the market as choosing the wrong one for the time period you are looking for can have dire effects on your finances. Some lenders can try and rip you off as these loans are often needed in an emergency so take care when seeking out a lender and do your research.
Overall these loans can be extremely beneficial when it comes to buying properties and needing quick cash. While they come with a whole list of advantages it’s always important before taking out any loan to know exactly what will be the right decision for you and your financial future.