Bridge Loan Vs Personal Loan: Which Should You Opt For
The world of short term loans is vast and can appear complicated at first glance. When deciding which kind of short term loan is right for you, consider why you need the loan and how quickly you can reasonably expect to pay off your loan.
Personal loans are mostly taken for debt consolidation, home renovations, weddings, and vacations. Usually, personal loans are taken in the ranges of $1,000 to $35,000 and are paid off over two to five years. Similarly, bridge loans are short-term loans, however, they’re typically obtained for real-estate purposes and are paid back within a year.
Keep reading to learn more about the pros and cons of these loans so you can discern if this is the right type of short-term loan for your needs.
What Is A Bridge Loan?
If you’re looking for a loan, you might’ve come across the term bridge loan. This kind of short-term loan is used until an individual (or a company) can obtain more permanent financing. As the name suggests, these loans provide just that, a bridge that allows the borrower to receive important cash to meet obligations until a more permanent solution is available.
These loans are a short-term financing solution that usually spans one year. Due to this short time, these types of loans may require collateral, like real estate, and are often subjected to higher interest rates than other loan types. Here are some important factors to keep in mind about these types of loans:
- They’re most often used in real estate situations
- It’s short term, likely one year
- They’re a temporary solution between needing immediate cash and securing more permanent financing
A common use of these loans involves real-estate dealings. For example, if you’re moving and have found your next home, but haven’t sold your old home, bridge financing can help you make the transaction and secure the new house. Once your old house sells, expecting it’s sold within the year, then you can start paying off your loan.
Bridge Loan Vs Personal Loan
Bridge loans and personal loans do share some of the same characteristics, including:
- Both are short-term loans
- They tend to have higher interest rates than other types of loans
- They may be subject to high origination fees and prepayment penalties
- Bridge loans and personal loans can provide cash relief quickly
The main qualifying difference between loan types involves the reasons behind applying for a loan and the repayment period. You’re more likely to find flexible repayment options with personal loans that range from two to five years. Bridge loans are more urgent, and typically need to be paid back within 12 months.
Bridge financing is the answer to many people when they’re in a difficult spot. The advantages are numerous and include:
- A fast way to secure much-needed financing
- Gaining quick access to equity without selling your home
- Give you the ability to present a stronger offer on a new home
- Options for people with poor credit history
Deciding if a loan will work for you depends on your specific needs. The shining advantage of this loan type is that it can give you breathing room and the ability to make real-estate decisions with some added flexibility.
When considering a loan, be sure to approach the situation with open eyes. The cons of bridge financing may include:
- The short term nature of the loan, usually between three and 18 months, means you’ll be subjected to larger monthly payments
- Risk is a factor to consider, especially since your future payment option may fall through
- Higher interest rates when compared to other types of loans
Like every loan, be sure to understand interest rates, penalties, and fees from each offer you receive from a lender.
Alternatives To A Bridge Loan
If you’re unsure whether a this loan is the right option for you, consider these alternatives:
- Asking family or friends for help, though this can be difficult to navigate in terms of personal relationships
- Taking out a home equity loan on your current home
- Borrowing against other assets like funds, stocks, and bonds
You may also consider asking someone you trust to cosign a loan with you. This can be very helpful if you have a poor credit history or have difficulty securing a loan alone.