Bridge Loan

Financial Dictionary -> Loans -> Bridge Loan

A short term loan of under a month in total is often called a Bridge Loan or Swing Loan and is used as a metaphorical 'bridge' between different more long term loan methods and sources of finance. They are usually used by businesses who can afford to take out a short and temporary loan whilst they decided or finalize other funds. This is generally used to keep their cash flow healthy until more stable forms of finance are put in place.

Because they are so short in term a bridge loan will prove to be more expensive than other loans, because interest rates are high and there are various fees associated with them. Although loan amounts vary, if the amount is particularly high it is considered quite risky for a lender, therefore a borrower will usually be a respected business or somebody with an impeccable credit score and history.

Using a bridge loan is also common in the real estate industry, with people that buy and sell property for a living. If for whatever reason they see a bargain or a house that can make them a significant profit in a relatively short amount of time a bridge loan may be sought to ensue the deal goes ahead quickly. This may also be used in the same fashion if they believe a turn in the economy is likely to happen soon.

Also if a home owner is in danger of defaulting their mortgage or is about to go in to the foreclosure process, being forced to sell the home to cover their mortgage debt, they may seek a quick bridge loan in order to prevent them from losing their home. This is risky and often only leads to the delay of foreclosure, rather than its ultimate prevention. A lender may not always be aware that the borrower is having financial issues with a mortgage before granting a bridge loan.

Another common use of the bridge loan is when somebody needs to make a down payment on a new home but their previous home has not yet been sold. The bridge loan therefore allows for a short period where they can close on the sale of their old property.