How bridging loans differ from personal loans?

How bridging loans differ from personal loans?

Bridging loans differ from personal loans in a most significant way. When you’re looking to fund a new property purchase or cover costs in a short period, understanding the right financial tool is crucial. They are two common options, each serving distinct needs and situations. While both provide financial assistance, their terms, usage, and accessibility differ greatly. This guide will explore these differences in detail, helping you make an informed decision based on your specific financial needs. Helping you understand how bridging loans differ to personal loans.

Definition and Basic Function

A bridging loan is a short-term finance solution primarily used in real estate transactions. It ‘bridges’ the gap between when you need to pay for a property and when you receive funds from a sale or a long-term loan. These loans are quick to arrange and have a short duration, typically from a few weeks to 12 months. They are almost always secured against property.

On the other hand, a personal loan is a sum of money borrowed from a bank, credit union, or online lender that you pay back in fixed monthly payments, typically over one to seven years. Personal loans are generally unsecured, meaning they do not require collateral like a home or car.

Usage and Application

Bridging loans are often used by property developers and buyers who need quick funding to purchase a property at auction or to secure a property before selling their current home. They’re also used for property renovation and conversion projects that require fast, flexible funding solutions. Generally the loan amounts are for £25,000 upwards, often as high as £multiple millions.

Conversely, personal loans can be used for a wide range of purposes. These include consolidating debt, financing a car, paying for a wedding, or covering emergency expenses. The flexibility in usage makes personal loans a popular choice for many financial needs beyond real estate. The loan amounts of available are far lower normally up to a maximum of around £25,000.

Loan Terms and Conditions

The terms of bridging loans can be very different from those of personal loans. Bridging loans typically have higher interest rates than high street Bank personal loans due to their short-term nature and higher risk. The interest on a bridging loan can be ‘rolled up’ to be paid at the end of the term, which can ease immediate cash flow issues but increase the total amount to be repaid. There are also fees, solicitors costs and valuation costs often associated with bridging loans. The loan is secured on property meaning the property is at risk of possession if the loan is not repaid in time.

Personal loans, in contrast, come with lower interest rates for borrowers with good credit scores. The interest is spread over the term of the loan/ This makes monthly repayments lower and more predictable than those of bridging loans. For small loans, even if the interest rate is 50%, it can still work out cheaper than a bridging loan. This is because of the setup costs associated with the bridging loan

Eligibility and Credit Requirements

Bridging loans are generally quicker to obtain than personal loans, with less stringent credit checks due to the secured nature of the loan. Lenders are more focused on the exit strategy—the borrower’s plan for repaying the loan—than on credit history. This makes bridging loans accessible to those with less-than-perfect credit scores but who have substantial equity in their property.

Because the loan is secured on property, that property is at risk if the bridging loan is not repaid.

Personal loans require a good to excellent credit score, especially for larger amounts. Lenders perform thorough credit checks to assess risk, and the borrower’s credit score significantly affects the interest rate offered. Those with higher credit scores will benefit from lower rates, making the loan cheaper over time.

Impact on Financial Planning

Choosing between a bridging loan and a personal loan can significantly impact your financial planning. Bridging loans, while quick and flexible, come with high costs and risks if the exit strategy fails. They are best for short-term, high-stake situations where the value of completing a transaction quickly outweighs the high cost of finance.

Personal loans offer more predictable costs and are typically safer for long-term financial planning. They allow for budgeting over time and can be used to manage cash flow without the immediate financial pressure of a bridging loan.

Summary

When looking for a loan amount of less than £25,000 an unsecured loan is likely to work out far cheaper and easier to arrange subject to credit score.

If you are not a homeowner a bridging loan won’t generally be available

If you need fast short-term finance which is property related, and you can office security, a bridging loan may be suitable.

However, if you are a property owner, don’t overlook normal remortgages or secured loans for large a loan amounts. They may be far cheaper. Speak to your broker about options available.

People Also Asked

What are the typical interest rates for bridging loans?

Bridging loan interest rates usually start from 0.59% per month (correct at the date of the article), depending on the loan amount, term, and borrower’s financial situation.

Can I pay off a bridging loan early?

Yes, you can often repay a bridging loan early, and doing so can reduce the overall interest you pay. However, check if there are early repayment charges.

What happens if I can’t repay a bridging loan?

If you can’t repay a bridging loan, the lender may take possession of the property used as collateral to recover their funds.

Is a personal loan better for debt consolidation?

Yes, a personal loan is often used for consolidating debt because it can offer lower interest rates and simpler monthly payments compared to multiple debts.

How fast can I get a bridging loan?

Bridging loans can be arranged within a few days, making them ideal for urgent property purchases and investments.