written by khatabook | November 28, 2022

What Do You Know About A Bridge Loan in India?

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A bridge loan is a type of short-term loan typically used to finance a property's purchase and/or renovation. Bridge loans are usually for a shorter term than traditional loans and often carry a higher interest rate. Bridge loans are popular in today's market because they can provide the funding needed for a quick purchase and can often be approved faster than a traditional loan. However, because they are short-term and carry a higher interest rate, borrowers should be comfortable with the terms before signing on the dotted line. 

Did You Know? Bridge loans can be a helpful tool for borrowers trying to sell their current home and purchase a new one, but they can also be a costly form of financing.  

What Is a Bridge Loan?

A bridge loan is a short-term loan used to "bridge the gap" between two financial transactions. For example, if a company is looking to buy a new piece of equipment but does not have the cash to do so, it may take out a bridge loan to finance the purchase. Bridge loans are typically only for a brief period, such as six months, and are paid back with the proceeds from the second financial transaction. 

Features Of A Bridge Loan

  • A bridge loan is used to finance a property's purchase and renovation, typically backed by some form of collateral. 
  • Bridge loans terms ranging from 6 months to 3 years.  
  • The primary purpose of a bridge loan is to "bridge the gap" between when a property is purchased (or renovated) and when traditional financing can be obtained. For example, if a buyer is purchasing a property that needs significant renovation work, they may not be able to get a traditional mortgage until the work is completed.
  • Traditional mortgages are mostly structured, where a mortgagor borrows on a fixed or variable interest rate, making payments until the loan is completely paid off. In this case, a bridge loan can be used to finance the property's purchase and renovation, to eventually refinance into a traditional mortgage once the work is completed.  
  • Bridge loans can be a risky proposition for both borrowers and lenders. For borrowers, the biggest risk is that the property may not be able to be sold or refinanced for enough money to pay off the loan. In this case, the borrower would be responsible for paying the loan in full, which could be difficult or impossible. For lenders, the biggest risk is that the borrower may default on the loan, leaving the lender with a property that is difficult to sell. 

Also Read: How to Apply for the Best Business Loan in India? - Types of Govt. Loan Schemes

Interest Rate of a Bridge Loan

Bridge loans typically have interest rates that are higher than those of conventional loans. This is because bridge loans are at higher risk than conventional loans. Lenders view bridge loans as riskier because they are typically used to finance the purchase of property not yet owned by the borrower. If the property is not sold or refinanced within the loan term, the borrower will have to produce the money to repay the loan. 

In addition, bridge loans are often used to finance the purchase of properties that need significant repairs or renovations. This also adds to the risk for the lender as there is no guarantee that the property will be worth the loan's value once the repairs or renovations are completed. Despite the higher interest rates, bridge loans can be a good option for borrowers who cannot obtain financing through traditional means. 

How Does Bridge Loan Work?

A bridge loan is a short-term loan used to finance the purchase of a new home before the borrower's current home is sold. Bridge loans are typically used when a borrower buys a new home before selling it. The loan is used to pay off the existing mortgage on the borrower's current home and provides the borrower with additional funds to use as a down payment on the new home. Bridge loans are typically short-term loans with a term of one to two years. The loan is repaid when the borrower's current home is sold. If the borrower cannot sell their current home, they may be required to repay the bridge loan with other funds. 

Also Read: Learn About Getting a Business Loan for Shopkeepers

Benefits of a Bridge Loan  

Bridge loans are popular in India because they offer a few advantages and benefits, including: 

  • They can be used to finance the purchase of a new home before the sale of the old one is complete, allowing buyers to move into their new home sooner. 
  • They can be used to finance renovations or repairs on a new home, making it easier to get the home in move-in condition. 
  • They can be used to pay off an existing loan, giving the borrower more flexibility in financing. 
  • They can consolidate debt, making it easier to manage monthly payments. 
  • They can be used to finance the construction of a new home. 

Drawbacks Of Bridge Loan  

There are several drawbacks of bridge loans in India.  

  • First, they are typically more expensive than traditional loans. This is because the lender is taking on additional risk by lending money to a borrower who may not be able to repay the loan. 
  • Second, bridge loans can be difficult to obtain. Lenders may be hesitant to lend money to a borrower with no solid plan for repaying the loan.  
  • Finally, bridge loans are typically only available for a limited time, which can be a problem if the borrower needs more time to repay the loan.

 Also Read: Top 5 Government Loan Schemes for Small Business in India

How To Get A Bridge Loan In India?

Bridge loans are popular in India because they offer quick access to capital for people who may not qualify for a traditional loan. 

Bridge loans can be used for a variety of purposes, including: 

  • Purchasing a new home before selling your old one 
  • Doing repairs or renovations to your home 
  • Consolidating debt 
  • Paying for unexpected expenses 

To qualify for a bridge loan in India, you will typically need a good credit score and a steady source of income. The loan amount and terms will vary depending on the lender, but you can expect to pay a higher interest rate than you would on a traditional loan. If you are interested in getting a bridge loan in India, you can start by searching online for lenders. Compare interest rates and terms to find the best deal for you.  

Conclusion

Bridge loans are typically available from banks, credit unions, and private lenders. The terms and conditions of bridge loans vary depending on the lender, but they typically have shorter terms than traditional mortgages and higher interest rates. Bridge loans are typically paid off when the borrower's current home is sold, and the proceeds are used to pay off the loan. Borrowers should carefully consider the terms of a bridge loan before entering one and ensure they can sell their current home within the timeframe of the loan. 

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FAQs

Q: How does a bridge loan work?

Ans:

A bridge loan works by providing the borrower with a short-term loan used to finance the purchase and/or renovation of a new home. The loan is secured by the equity in the borrower's current home, and the borrower makes payments on both the bridge loan and their current mortgage until the new home is complete and they can sell their current home.

Q: What are the risks of a bridge loan?

Ans:

Bridge loans can be risky for borrowers if they cannot sell their current home within the loan terms. If the borrower cannot sell their home, they may be required to pay back the loan in full, plus interest and fees. Bridge loans can also be a risk for borrowers if the value of their current home decreases.

Q: What should I consider before taking out a bridge loan?

Ans:

Before taking out a bridge loan, borrowers should consider the risks and benefits of the loan. Borrowers should also speak with a financial advisor to ensure that a bridge loan is the best option for them.

Q: What is a bridge loan?

Ans:

A bridge loan is a type of short-term loan typically used to finance the purchase of a new home before the borrower's current home is sold. Bridge loans are typically interest-only, with terms ranging from six months to three years.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.