Bridging Loan

A lump sum to tide you over, usually during house purchase

A bridging loan is a specialised loan; usually a large sum lent over a short period (weeks to six months). Usually a bridging loan is used to cover shortfalls between buying one property and selling another; or to cover businesses between funding tranches. Costs are high; at up to 2% above normal lending rates- only get a bridging loan if circumstances force you into it!

A bridging loan is a specialised type of loan taken out over a very short period of time.

You will know already that a standard loan gives you the money now, and schedules repayments over a fixed term; usually two to seven years. The cost of the loan is quoted as an APR, the interest you'll pay across a year. A bridging loan is used in specific circumstances to cover a shortfall over a very short period of time (indeed bridges are rarely available over periods beyond six months at most). The best example is the process of moving house, where you wish to complete the contract on your new property before the money in your old property is freed up. As you can imagine, this can be a huge sum (in the hundreds of thousands of pounds) but the term across which the bridge is required might be very short (a couple of weeks perhaps).

There is a similar parallel in business, particularly in capital costs, where you are selling old equipment and buying new equipment (say vans or printing presses) or you require a loan to cover the time before say, a government grant is paid to you.

In all these instances, your bank or building society can provide you with a bridging loan to cover the large amounts of debt you will be in for a very short time. What you need to know is this: in all instances, the bridging loan is born of desperation; and as such, your lender will know you're over a barrel. You can therefore expect to pay at least 2% above the lender's base lending rate. Bridging loans are usually quoted on a monthly basis (rather than annually)- that's not just because they're short term, but also because if you saw the APR you'd realise how much money you were losing compared to a standard loan! There is also often a management fee, although some lenders are now charging a flat rate for bridging loans. So more than in any other case, it pays to shop around. If you can avoid a bridging loan, do so. If you can't; then do your homework.