Top Considerations for Choosing the Right Bridging Loan Term

Bridging Finance Small Business

Bridging loans have the potential to be a flexible, affordable, and accessible solution when you need a short-term financial boost in a hurry. Once typically associated with commercial borrowers and strict business applications, recent years have seen more everyday borrowers consider these fast-access funding solutions than ever before.

But while it can be comparatively straightforward to apply for and receive a bridging loan, it is not a facility to take out without careful forethought. Careful consideration of several key factors is essential to ensuring you make the right decision, one of which is the most appropriate term for your bridging loan.

It’s possible to take out a bridging loan over a period of anything from a couple of weeks to around 18 months. Interest and borrowing costs are typically ‘rolled up’ into the final loan balance, with no monthly repayments required in the interim.

The question is, how do you know what bridging loan term is right for you? More importantly, what are the most vital considerations you need to factor in prior to deciding when you will pay your lender back?

Six essential bridging loan term considerations

  1. The strength of your exit strategy

A core component of any bridging loan is the exit strategy, i.e., how and when you plan to repay the loan. Whether it’s the sale of a property or expected income from a business or inheritance, a solid exit strategy reassures lenders about your repayment capabilities. However, if your exit strategy isn’t set in stone or fails to generate the expected revenues when that time comes, a longer term may be essential to enable you to raise the money needed to repay your loan.

  1. Monthly interest payable

Considering the interest payable each month on your bridge loan is vital. You will typically find that while the monthly interest rates on a longer-term bridging loan are lower, what you end up repaying is significantly higher. It’s the same with almost all types of personal and commercial loans: longer repayment terms equate to higher overall borrowing costs. In addition, lenders often show preference to borrowers who intend to repay their loans as quickly as possible, which are considered lower-risk transactions.

  1. Penalties for missing deadlines

Missed or late payments can result in penalties that can significantly impact your total repayment, along with your credit rating. A shorter bridging loan term might sound appealing initially due to the potential to make savings, but it’s important to consider your repayment capacity before committing. You’ll have a fair amount of freedom when it comes to determining your own preferred repayment date, but the last thing you want is to realise subsequently that you did not give yourself enough time.

  1. Issues that could affect the ability to repay

Unexpected issues such as market downturns, property sales that fall through, or business performance problems could affect your ability to repay. Assessing these potential risks in advance is essential; all potential outcomes should be considered where your exit strategy is concerned. Ideally, you should be looking to choose a bridging loan term that provides something of a buffer in the event that you face any unexpected yet inevitable issues along the way.

  1. Potential savings with prompt repayment

Where possible, it’s worth placing emphasis on the potential savings of repaying as soon as possible, with a shorter term. Though this means less time to come up with the full balance and a potentially higher monthly rate of interest, the total amount you pay will always be lower when you repay your loan as promptly as possible. Again, you need to ensure you allow yourself a realistic period of time to raise the funds needed to repay your debt.

  1. Early repayment options without penalties

Repaying earlier than agreed can save you a substantial amount in interest payments and overall borrowing costs. However, not all bridging loan providers offer penalty-free early repayments. Check directly with your provider to confirm if this is an option. Depending on your lender’s flexibility, you could potentially choose a longer-term bridging loan, but with the aim of repaying it earlier if doing so proves to be feasible.