Bridging the Personal Loan Gap
There are few situations where an individual may consider taking a bridge loan. In most cases, these loans are used when there are two pieces of real estate involved; one that is being purchased and one that is being sold. A typical scenario is exactly as described above; however, some other options may be:
Purchasing a business: In some cases, a homeowner who has a great deal of equity may be considering purchasing a business. While they are waiting for a business loan to be complete, they may elect to take a bridge loan. This would mean the lender would have a lien on their personal property while the loan was outstanding;
Land acquisition expenses: Some people who have decided to purchase land and have a home built may find that obtaining land and a construction loan is a longer process than they originally anticipated.
In this instance they may have other assets such as investment property, securities or cash value in a life insurance policy that would allow them to accept a bridge loan. This is an atypical example.
Because interim financing often involves high interest rates, there may be better options including home equity loans, loans against life insurance policies or personal loans. In extreme cases, interim financing may cause more financial problems than they help solve.
Understanding the risks
One of the challenges that these types of loans create is that because of the higher interest rates that are associated with them, the monthly payments could be burdensome. Additionally, there is no guarantee as to how quickly a home will sell or a construction loan will be complete.
The overall cost of a bridge loan can be staggering if it is not paid back within a short period of time. In addition, since these loans are typically good for only one year, a homeowner who is unable to sell their property may be facing foreclosure if they are unable to sell their home.