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What Is A Bridge Loan ?
A bridge loan is a short term loan that is used to finance investments made for the near term. As the name implies, a bridge loan is used to bridge the gap between longer term financing needs and the very near term needs. |
A bridge loan is an intermediary between what is required now and what is required for financing over a period of years.Bridge loans are more expensive than other forms of financing because of the fact that they carry the risk associated with short term financing in the absence of longer term collateral like homes and other physical and immovable assets. Often, the bridge loan is given on the basis of implicit guarantees that the borrower would repay and is contingent on the credit history of the borrower that measures the ability of the borrower to repay.
Though the term bridge loan can mean only the short term needs, some of them can extend to as much as three years as well. Further, the fact that bridge loans are not secured tightly means that apart from higher rates of interest, the penalties for non-payment are also greater. This makes the process of lending as well as borrowing fraught with risks and hence the bridge loans are often referred to as double edged swords that can cut both ways. Typically, bridge loans are used to refinance mortgages with shorter term borrowing rather than going in for a longer term loan. Hence, the emphasis is on repaying in the near term rather than in the longer term.
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