Explained: What is a bridge loan?

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Loans are generally considered a way out to finance your house, car, medical treatment, or expensive property purchase. However, sometimes you probably want a small loan to suffice an immediate, short-term expenditure like an impending down payment. If you’re in need of quick cash, a bridge loan is an option worth exploring.

A bridge loan is basically is a short-term loan that can be used to meet your immediate financial needs. It is an apt solution for those individuals who don’t wish to take the burden of long-term debt. This means if you have an identified and stable source of cash inflow that will let you meet your financial obligations sooner or later, bridge loans can be a good escape from the trap of traditional loans.

Loan for three weeks to one year

The loan amount and interest rate offered under bridge loan depend entirely on the borrower’s repayment capacity. Popular synonyms of bridge loan include names likes ‘swing loan’, ‘interim financing’ or ‘gap financing’. These loans are average taken for a period of 2 to 3 weeks and can extend up to a period of 12 months. Your asset collaterals like equity and debentures generally back such short-term loans.

A loan application form must be filled and submitted to your bank. This will include additional documents like income proof, identity proof, address proof, and passport size photographs. A percentage of this loan amount may be charged as the processing fee. The loan amount depends on your repayment capacity.

Payment in EMIs

The borrower must repay the debt by paying equated monthly installments (EMIs) or paying interest till the entire loan is repaid. The interest rate will depend on the total loan amount and the capacity of the borrower to repay. Additionally, the collateral that is being offered also impacts the rate of interest. The current interest rates on bridge loans vary between 9% and 18%. There is a processing fee charged for these loans that range between 0.35% – 2% of the loan amount.

HDFC Bank bridge loan is a good example of short-term loans in India. The loan, which is offered for a period of 2 years, can be availed through any HDFC bank branch across the country. Interest on any loan amount for residential property and commercial property is 12.30% and 13.15% per annum, respectively.

SBI bridge loan, on the other hand, offers loans up to Rs 2 crore for a two-year time period. Here the interest rate (starts at 9.90% for the first year and 10.90% for the second year) is slightly less than usual.

While bridge loans provide quick cash, the soaring interest rates can ultimately prove to be a costly affair for you. If you fail to repay a bridge loan in time, a huge debt trap might await you at the other end.