About Bridge Loan
A bridge loan is a short-term, interim financing solution designed to “bridge” the financial gap between immediate funding needs and securing permanent financing or selling an asset. Commonly used in real estate transactions, bridge loans enable borrowers to purchase a new property before selling their current one. They are also used by businesses waiting for long-term financing to cover operating expenses temporarily.
What Is a Bridge Loan?
Also known as a swing loan or interim financing, a bridge loan provides quick, short-term funds backed by collateral—often the borrower’s current property or business assets. The loan typically lasts between 3 months to 1 year, helping borrowers manage cash flow and transition during a financial gap.
How Does a Bridge Loan Work?
Borrowers receive financing secured against existing assets (usually a home or commercial property).
The loan amount is often up to 80% of the current asset’s value.
The borrower uses the funds to purchase a new home or meet interim financial needs.
Once permanent financing is secured or the existing asset is sold, the bridge loan is repaid fully.
Interest rates on bridge loans tend to be higher than conventional loans because of their short-term nature and higher risk.
Types of Bridge Loans
Closed Bridge Loan: Has a fixed repayment date, typically tied to a specific event like the sale of the current home. Usually has lower interest rates due to certainty.
Open Bridge Loan: Does not have a fixed repayment date, offers more flexibility but generally comes with higher interest rates.
First Charge Bridge Loan: The primary lien on the asset, meaning the lender has the first claim if the borrower defaults.
Second Charge Bridge Loan: Secondary lien, meaning the lender gets paid after first charge lenders in default situations.
Benefits of Bridge Loans
Quick Access to Funds: Fast approval and disbursement to meet urgent financial needs.
Helps Buy Before Selling: Enables buyers to purchase new property without waiting for the current one to sell.
Flexible Use: Can be used for property purchases, business working capital, or covering short-term expenses.
Collateral-Backed: Typically easier to obtain if you have significant asset value.
Bridges Financial Gaps: Provides peace of mind during funding transitions and business cycles.
Frequently Asked Questions
What is the typical duration of a bridge loan?
Bridge loans usually last between 3 months and 1 year, though some can extend to 2 years depending on the lender and circumstances.
What collateral is required for a bridge loan?
Borrowers commonly pledge their existing home or commercial property as collateral, but other valuable assets may sometimes be accepted.
How much can I borrow with a bridge loan?
Generally, lenders lend up to 80% of the value of the existing collateral property.
Are interest rates on bridge loans high?
Yes, interest rates are usually higher than traditional loans, often ranging 2% above prime due to short tenure and risk factors.
Can both individuals and businesses take bridge loans?
Yes, bridge loans are used by homeowners, real estate investors, and businesses needing short-term capital.
What happens if I can’t repay the bridge loan on time?
Since bridge loans are secured, failure to repay may result in seizure of the collateral. It can also impact your credit rating.
Published on: July 23, 2025
Published by: PAVAN
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