Bridge Loan - Features, Advantages and Meaning

Read on to know the meaning and features of bridge lending, as well as the key differences between a bridge loan and a personal loan.
What is a bridge loan
5 min read
19 July 2023

A bridge loan is a short-term loan used to provide immediate funds. A bridge loan is given to a borrower to help them bridge the gap between their planned spend and a available funds.

For instance, you might have plans to purchase a new house with the sale of an existing house. A gap between receiving the latter and selling the former, though, may halt your goals. That is where bridge loan financing can be used. Typically, bridge loans are secured by collateral, such as real estate or any asset, and are characterised by higher interest rates with shorter repayment terms.

What are the features of a bridge loan?

Bridge loans possess several distinctive features that set them apart from traditional loans. Here are some key features of bridge loans:

  • Short-term loans:
    Bridge loans are designed to be short-term financing solutions, usually with a repayment period ranging from a few months to a year.
  • Quick approval:
    Bridge loans have streamlined application and approval process. Lenders can expedite the assessment of collateral and other factors, enabling borrowers to access funds swiftly.
  • Collateral:
    Bridge loans are typically secured by collateral, such as property, inventory, or other valuable assets. The loan amount is determined based on the value of the collateral.
  • Higher interest rates:
    Bridge loans generally come with higher interest rates compared to traditional loans. The elevated rates compensate lenders for the increased risk associated with short-term financing and the fast approval process.
  • Repayment options:
    Bridge loans often offer flexible repayment options, allowing borrowers to structure the repayment terms according to their specific needs and circumstances.

How does bridge loan work?

A bridge loan works by providing short-term financing to bridge a financial gap. Typically used in real estate, it covers immediate needs like purchasing a property before selling an existing one. Once the sale occurs or more permanent financing is secured, the bridge loan is repaid, often with higher interest rates.

Examples of bridge financing

Examples of bridge financing include bridge loans, short-term lines of credit, and convertible debt. In real estate, individuals may use these instruments to address immediate financial gaps, such as buying a new property before selling an existing one. These temporary funding solutions facilitate smoother transitions until long-term financing is secured.

Pros and Cons of bridge financing

Pros of bridge financing include quick access to funds for immediate needs, facilitating time-sensitive transactions. It's useful in real estate transitions. Cons include higher interest rates and potential risks if the exit strategy (e.g., property sale) doesn't proceed as planned, leading to financial challenges. Assessing risk and having a clear repayment plan is crucial.

What is the difference between a bridge loan and a personal loan?

Bridge loans and personal loans are both financial products that individuals can use to meet their financial needs. Here are the key differences between bridge loans and personal loans:

  • Purpose:
    Bridge loans are designed to bridge a temporary financial gap between two transactions or events. They are commonly used in real estate transactions, where borrowers need immediate funds to purchase a new property before selling their existing one. Personal loans, on the other hand, are typically used for a wide range of personal uses. They can be used to finance expenses such as home renovations, education, medical bills, or other personal needs.
  • Terms and repayment:
    Bridge loans are short-term loans, usually ranging from a few months to a year. They often have higher interest rates than personal loans due to their short-term nature and the associated risk. Personal loans generally have longer repayment terms, ranging from a few months to several years. They usually have a personal loan interest rate and regular monthly instalments, which include both principal and interest.
  • Collateral and eligibility:
    Bridge loans are typically secured by collateral, such as real estate or other valuable assets. The collateral compensates the lender in case of default. Lenders assess the value and equity of the collateral to determine the loan amount and eligibility. On the other hand, personal loans are unsecured, meaning they do not require any collateral. Instead, lenders evaluate the borrower's creditworthiness, income, employment history, and credit score to determine the eligibility of the borrower.

    Bridge loans provide financial assistance during transitional periods when immediate funds are required. You can usually get a bridge loan only if you put up some sort of security as collateral. Personal loans would therefore be your best option if you do not want to put any of your assets as collateral and want to repay the loan over a longer period.

    Bajaj Finance Limited offers personal loans of up to Rs. 40 lakh. These loans do not require any security in the form of collateral and can be repaid over a longer period of 96 months.

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Frequently asked questions

What is bridge financing?

Bridge financing is a short-term loan used to bridge a financial gap, often in real estate transactions. It provides temporary funding until a more permanent source is secured. Typically, it helps individuals or businesses meet immediate financial needs, such as buying a new property before selling an existing one, facilitating smooth transitions.

What is an example of a financial bridge?

An example of a financial bridge is a bridge loan. In real estate, a bridge loan can be used to cover the gap between the purchase of a new property and the sale of an existing one. It provides temporary funding until a long-term financing solution, like a mortgage, is arranged.

What is bridge gap financing?

Bridge gap financing refers to short-term financial solutions that address immediate funding needs. It is often used in real estate when there is a financial gap between buying and selling properties. This temporary financing, like bridge loans, helps bridge the financial divide until a more permanent funding source is secured.

Which instrument is used for bridge financing?

The primary instrument used for bridge financing is a bridge loan. This short-term financial tool helps individuals or businesses bridge the gap between their immediate funding needs, such as buying a property before selling an existing one, until a more permanent financing solution, like a mortgage, is arranged.

What are the two types of bridge loans?

The two main types of bridge loans are closed-bridge loans and open-bridge loans. Closed-bridge loans have a specific repayment date, while open-bridge loans do not, providing more flexibility. Both types serve as short-term financing solutions, often used in real estate to cover transitional periods between property transactions.

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