This is one of the most frequently asked questions when it comes to bridging loans. There are a handful of differences which you should be familiar with when approaching your loan. This blog aims at highlighting the pros and cons of both; remember: if you’d like further information about this then please do contact us directly!
What is a bridging loan?
In simple terms, a bridging loan is a way of getting your hands on money which you will need for a short period of time. It is there to ‘bridge’ the gap so to speak. Unlike long-term loans which stand for a period of a year or less, you won’t be paying this loan back in monthly instalments; but as one lump sum instead. They are most commonly used to borrow money while you wait for funds expecting to land in the very near future.
An individual or an organisation can take out this type of loan, for both personal and commercial reasons. For example, bridging loans are often given to individuals who need to make a payment in relation to their property. Similarly, if a person is buying a house, but is yet to complete the sale of their current house, then a bridging loan can be used to secure the purchase of the new home whilst waiting for the existing one to sell. It usually takes between 1-2 weeks for a bridging loan to be organised dependent on the lender.
What is an open bridging loan? (OBL)
An OBL is for someone who does not yet have a clear ‘exit strategy’. However, it is important to remember that you will have to repay the loan when it is due. An example of an OBL in use is when you may be relying on a property sale to pay back the loan, but do not have yet have a buyer or a fixed date when the property sale will be completed.
Due to the risk, the interest rate on OBL’s is often a lot higher and the lender will have to be satisfied that you will be able to pay back the loan. You will be expected to repay the loan within 6-12 months, depending on the terms you agreed at the start. If this is not done then penalty fees will be issued. Of course, if you are able to pay back the loan sooner than you initially thought then this is welcomed, too.
What is a closed bridging loan? (CBL)
A CPL is one whereby the lender knows exactly how and when repayment will be made. This is also known as the ‘exit strategy’. A CPL would be used if an individual has a completion date for a property transaction for example.
A CBL is a lot less risky so the interest rate is far less than with an OBL. To obtain one of these loans, you will have to provide proof of how you are planning to pay back the loan, and also proof of commitment to a fixed date.
Penalties
Lenders charge commercial and individual borrowers penalties for loans that are not repaid on time. These can range from an extra 1% interest, to considerably more.
For individuals and commercial organisations who are interested in a closed or open bridging loan, the first step is to talk to us at SME funding. You can book a free consultation with us today! We can find the best bridging loan tailored to your requirements. However much you need, we can find the most competitive UK rates for your loan.
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Please note SME funding UK Ltd are brokers and not funders themselves.