Have you heard the term Bridge Loan? What do you think it is? Is it finance taken from financial institutions to construct bridges or it has a deeper meaning to it? Well let us find out.
Presume you have been living in your own 1BHK apartment for a very long time. Now your standard of living has improved and you want to upgrade to a better living place. So after a long search you have zeroed in on your dream home.
You have decided that you will finance part of this new home from the sale of your existing apartment. But you have not yet sold your apartment and you do not want to let go of your dream home because of your blocked money.
What will you do then?
Well one of the alternative is that you can opt to take a bridge loan from any bank or financial institution.
What is a bridge loan?
The Economic Times defines bridge loan as a type of ‘gap financing arrangement’ wherein the borrower can get access to short-term loans for meeting short-term liquidity requirements.
In other words, you can say that bridge loan is finance that is availed, at the time of a short term mismatch in liquidity. Just as a bridge is used to reduce the travelling time between two places, in the same way a bridge loan is used to reduce the time frame between the demand and supply of money.
The bridge loan sanction amount is decided based on the sale value of the existing home (used as collateral) and the repayment capacity of the borrower. The loan is usually sanctioned for a very short duration. For example, the State Bank of India (SBI) home bridge loans have a repayment period of up to two years. The interest charged on bridge loans are higher as compared to the interest rates on regular loans.
Besides the point mentioned above, bridge loans can also be used to meet the short term financial requirements of businesses.
Suppose an entity has been sanctioned a long term loan but due to some circumstances, there is a delay in the loan amount getting credited into the entity’s account. On the other hand the entity is in immediately need of funds, otherwise it will suffer losses.
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What can the entity do?
One alternative is that the entity approaches a bank and avails of a bridge loan and thus continues running its business smoothly. This bridge loan amount cannot be used for any purpose other than for which the long term loan was sanctioned. As soon as the earlier long term loan amount gets disbursed, first the bridge loan amount will stand repaid.
Similarly bridge loans can also be sanctioned against future expected cash inflows.
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