What is a Bridge Loan? Why is it Important?

What is a Bridge Loan?

A bridge loan is also known as gap financing. A bridge loan is a short-term loan sanctioned for the borrower who wants to meet short term financial requirements. The tenure of bridge loans is capped at 5 years. The loan amount sanctioned and the interest rate on the loan is calculated by evaluating the repayment capacity of the borrower.

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What is a Bridge Loan? Why is it Important?

Features of Bridge Loans:

The key features of the bridge loan are as follows:

• A bridge loan is backed by collateral.
• The maximum tenure is 5 years
• The amount sanctioned is decided based on the repayment capacity of the borrower.
• The borrower must repay the loan in monthly instalments in the form of EMIs.
• The interest rate and the tenure of the bridge loan also depend on the income of the borrower and the value of the collateral.

See Also: Types of Personal Loans

How do Bridge Loans Function in India?

In India, the bridge loan can be structured in two ways. They are:

• You can opt to pay off the liens on an existing/current property
• You may choose to have it over an existing lien.

If you are using the bridge loan to pay off the existing liens on a property, then the remaining loan amount can be used to make the down payment of your new house. If you avail the bridge loan as a second or third mortgage, then it’s used solely as down payment on a new house.

A borrower must be cautious before applying for a bridge loan and must take care that all his liens are paid off within a year. Instead of taking a bridge loan, it is wise to arrange down payment by selling your shares, mutual funds or assets instead of availing loans. Avail a bridge loan only as the last option, as these are expensive loans.

See Also: Personal Loan In Bangalore

Benefits of Bridge Loans:

Bridge loans are useful while purchasing real estate. If there’s time lag between the purchase of a new property and the sale of an existing property, then you may avail a bridge loan. Real estate bridge loans are offered to individuals having a high credit score and low debt to income ratio. Bridge loans provide the buyer with the flexibility of purchasing a new house, without selling the existing property. The money received by selling the existing property can be used to settle the bridge loan.

Pros and Cons of Bridge Loans:

Bridge loans are not a very attractive funding option and many financial advisors discourage clients from availing a bridge loan. Bridge loan comes with high lender fees, closing costs, high interest rates and origination fees. Listed below are the pros and cons of availing a bridge loan:

Pros:

• You can shift to your new house before selling the existing house.
• Put up your existing house on sale and buy a new house without waiting for the payment on sale of the old house.
• Save money on rent.
• The interest payments can be made in a lump sum at the end of the loan tenure.
• Bridge loans generally do not have pre-payment charges.

See Also: Personal loan in India

Cons:

• Bridge loans generally have high interest rates.
• You have to pay the loan even if your existing property is not sold.
• It’s not easy to qualify for bridge loans
• Higher EMI payments can lower your monthly savings
• Short repayment period.
• Paying closing costs and other fees on bridge loans may not seem very profitable
• This may lead to a rush in selling your existing property. In such a situation you may end up in losses due to lack of time for a negotiation.

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