A bridge loan is a type of personal loan that is used by the borrower to “bridge” two other loans or to get through a brief period of financial shortfall. As a very short-term loan, the rates that one must pay tend to be quite high, but when a bridge loan is needed, it is a necessary expense. Keeping that in mind, due to the high cost of this type of personal loan, paying careful attention to the details of the loan one is considering is important.
The Classic Bridge Loan ExampleThe most common instance in which a bridge loan is used is to connect two mortgages. Not to be confused with a reverse mortgage, one would look for a bridge loan when buying a new property ahead of selling the existing one. Often a lender is unwilling to extend sufficient credit to cover two properties, but the home buyer may need to close on his or her new house before the old house has been sold. Under these circumstances, a bridge loan is used to purchase the second property and then, when the old house is sold and the original mortgage close, the bridge loan is rolled into the new mortgage.
Other Types of Bridge Loans
For individual who needs bad credit loans or simply short-term cash, the bridge loan has become a more common instrument. While not what is typically considered as such, a payday loan is a type of bridge loan because it is an expensive short-term loan designed to cover a short period of time. It is used to help the individual bridge the period between paychecks in order to cover an unexpected cost. These loans are not meant to cover long-term expenses, like a student loan, for example.
Regardless of the specific circumstances that lead to one’s need for a bridge loan, it is important to consider if it is really needed. As mentioned above, the majority of bridge loans are quite expensive relative to other types of loans. The best way to avoid this cost is to avoid the circumstances that lead to need. For example, if one can avoid closing on a new property until the original one is sold, there is no need to absorb this cost. Overall, this type of loan serves a specific purpose, and as long as one uses it for that reason, it can be a useful financial tool.