Bridging loans can be a good idea for those needing a quick, financial solution; however, like most things, it comes with a risk.
You firstly need to make sure that the bridging loan is the correct solution for you, make sure you have everything required and have considered the risks when it comes to getting a bridging loan.
There are various risks to be aware of when you get a bridging loan such as losing your home if you fall back on payments. The loans are expensive and mistakes can be crippling with expensive penalties. Always get professional advise before getting a bridging loan.
Is A Bridging Loan The Right Thing For You?
Before looking at the risks, you firstly need to consider if a bridging loan is the right financial solution for you.
They’re a short-term, financial loan which means you will be required to pay the money back within 12 months. It would be best if you made sure that this is something you can commit to and have a way of paying the money back.
Planning is the best thing to do. Think about your situation, what the money is being used for, how the loan can be paid back and if it is practical that it will be paid back within a year. Some of the uses for a bridging loan include:
- Property development
- Purchasing a property
- Renovating a property
- Pay inheritance tax
- Business purposes
These are just a few of the reasons, but a bridging loan can pretty much be used for any reason.
As long as you can meet the repayment terms and conditions that the lender sets, then a bridging loan can be a good option, if you need a big sum of money, quickly.
Find out more about bridging loans here.
What Do You Need For A Bridging Loan?
When getting a bridging loan, there is a consultation and application you will need to go through, and during this, the lender may ask for certain things.
Each lender is different and will also ask for other things during the application and valuation. It also depends on the situation and what the money is being used for.
Suppose the bridging loan was being used for property development purposes.
In that case, the lender may look into the property and ask for paperwork and plans relating to this, so they’re able to calculate the gross development value.
On the other hand, they may ask questions about your financial history and look into things like that.
However, some key things are needed when it comes to getting a bridging loan, and without these, you won’t be accepted for one.
- Security-
One of the main things that are needed to get a bridging loan is security. This is in the equity in your assets and can be anything such as property, car, land etc.
Anything that has a considerable value to it can be used as security against the loan.
Not only does this enable you to get a loan but it also means the lender keeps this security, so if in the event you are unable to pay the loan back, the security can be used. It covers yourself and the lender from running into any problems along the way.
- Exit Strategy-
This is another crucial thing you must have, in order to get a bridging loan. An exit strategy is how you plan to pay the loan back and where the money will come from.
In some cases, it can be very easy and straight forward, but others may struggle. This is something to consider when thinking of a bridging loan as it can be a risk.
If you don’t have a strong exit plan, then you may find you run into trouble when it comes to paying the loan back.
In the case of property development or renovation, the property will be used as the exit strategy as the money from the sale of it, can be used to pay the loan back.
However, in some cases it may not be as simple as this, so you may need to think about how you will get enough money and be certain that the loan can be paid back within the short time agreed.
The Risks Of A Bridging Loan
There are some risks when it comes to getting a bridging loan, and it’s essential to think about these, before committing to one:
- Expensive-
Not only are you borrowing a potentially large amount of money that is to be paid back within a short amount of time, but you also have extra fees to pay on top of this.
There is a risk that the lender will want large repayments, so you need to make sure the money will be available if this was to happen.
Also, there are additional fees and interest rates that need to be considered and ensure that these can also be paid on top of the loan.
- Delays In Payment-
If there are any delays in repayment, whether you’re waiting for the money or missed a payment, the lender can charge large fees for this.
It is potentially putting the lender in debt and therefore, they will charge you even more money, to compensate for it.
This is why it’s crucial to plan and have a strong exit strategy, that can guarantee money to repay the loan.
- Breaching The Terms Of The Loan-
When getting a bridging loan, make sure to read the terms and conditions thoroughly and understand the terms.
You don’t want to breach any of the terms of the loan as this can result in paying fines, which means more money to pay.
- Exit Strategy Fails-
There is a significant risk that your exit strategy can fail, as it’s not a promised or guaranteed income.
Even if you have a strong exit strategy, there is always the risk that it won’t go to plan, and something could happen, to change this.
In the event of this happening, you may struggle to find than the money to pay the loan back and the longer you have the loan and more payment dates you miss, the more money it will cost.
The best thing to do is try to have as many possible back up plans as possible, so if one fails, you have a back up to be able to pay the money back. Consider this risk when planning your exit strategy.
