Bridge loans are a fascinating form of credit that most consumers do not know much about. That could be because consumer bridge loans are not nearly as common as their commercial counterparts. There are a number of differences between the two as well, leading financial experts to recommend against consumer bridge financing.
If you are thinking that a bridge loan might be the answer to immediate financial needs, be sure to know what you are doing before you make the decision to borrow. Research bridge loans as much as you can. Below are some of the primary differences between consumer and commercial bridge loans, just to get you started.
Common Purposes for Bridge Loans
By definition, a bridge loan is a short-term loan intended to bridge the gap between immediate funding needs and future financial resources. Bridge loans can be best understood by discussing what they are commonly used for. Let us start with the consumer version.
Nearly all consumer bridge loans are utilized to bridge the gap between selling one house and buying another. For example, imagine you are looking to buy a new $200,000 home. Your current home is valued at $100,000 and you still owe $65,000. An $85,000 bridge loan would allow you to pay off your mortgage and have money left over for closing costs and a down payment on your new home.
Assuming the terms of your loan are one year, you have 12 months to sell your existing home and apply the proceeds from the sale to pay off the bridge loan. That is the way it is supposed to work. If you get to the end of the year and still haven’t sold your old home, you’ll have to find some other way to make the balloon payment.
Commercial bridge loans work in much the same way. The difference is this: commercial bridge loans can cover a much wider variety of needs. Some borrowers use bridge loans to buy real estate. Others are business owners who depend on bridge financing to replace aging equipment. Still others expand their businesses by using bridge funding to get things rolling while they wait for SBA loans.
Terms and Interest Rates
Another big difference between consumer and commercial bridge loans is in the rates and terms offered. By definition, bridge loans are short-term loans. This means that private lenders tend to charge higher interest rates. Commercial bridge loans can have higher rates than consumer loans.
Terms for a typical consumer loan are one year. For commercial bridge loans, terms are typically six months. Yet there are private lenders, like Salt Lake City’s Actium Partners, willing to write commercial loans for up to one year.
Bridge Loan Frequency
Finally, there is a major difference between consumer and commercial bridge loans in terms of frequency. Consumer bridge loans are relatively rare these days, thanks to the prevalence of home equity lines of credit. Someone caught in the middle of selling one house and buying another can more easily tap into existing lines of credit to meet short-term funding needs.
In the commercial sector, bridge financing is fairly routine. Companies like Actium Partners are quite successful because bridge funding is so attractive to businesses and entrepreneurs. Bridge loans are perfect for everything from real estate development to house flipping and business expansion.
Bear in mind that bridge loans are right for some opportunities but not others. Do not agree to bridge financing unless you are absolutely sure you know what you’re getting into. Used correctly, a bridge loan can be an excellent financial tool. Used incorrectly, it could become a nightmare.