Bridging loans often pique people’s interest when they struggle with their payments for a short time. By all means, you might also be looking for a loan type that can ease your repayment method and best suits your needs.
Securing the loan may seem like a glittering prospect but repaying it defines your financial goals. So when securing any loan, the first thing that should come to your mind is how to repay it.
Based on those repayments, these loans come in two kinds–Open and closed loans. Before you get your hands on any of these, let’s discover their difference.
Bridging loan–an overview:
A bridging loan is an easy method to get money on a short-term basis. A typical loan cycle ends after a year. It means you must repay the loan after a year or less.
Its interest rates are higher than mortgages, but you get a lump sum when the loan gets secured. People avail of this loan to keep their cashflows going when they don’t have enough to purchase a commodity.
In most cases, they use the loan amount to buy property. So, it can be defined as a loan that bridges the gap between buying a new property and selling the existing one. You can also get it via P2P lending.
Some of its primary use cases are:
- You want to buy a new property, but your existing property sale takes time. So, you get bridging finance to pay the seller and meet the loan repayment with your property sale equity.
- You desire to win a property on auction that seems a better prospect for you. You can use this loan type to get the money on short notice. Afterwards, you can generate the funds to pay off your loan.
- Similarly, you use this loan when the mortgage isn’t available for the time being. Then, later, you can refinance it to pay the loan.
What defines a closed or open loan?
If you need to know one thing that governs the loan type, then it’s none other than your loan exit strategy. Every loan has an exit strategy that tells when and how your case will get closed. However, you may mess up your financial situation if you don’t know how to end your loan.
It’s pertinent to know how to repay your loan. First, you better know your finances. Then, assessing your situation, you can bet on your loan type. Based on this strategy, you can choose whether you want to go for a closed or an open loan.
Closed bridging loans:
It’s a short-term bridging loan that defines the repayment date and process. You have a defined exit strategy when you agree with your lender on a closing date. In this loan agreement, you have to clear everything to your lender. For instance, you must explain the method and the source of your repayment money.
Open bridging loans:
An open loan that doesn’t have a clear exit strategy. In other words, you don’t agree to the repayment date. In this loan, you neither mention the repayment date nor define from whom you would get the money. Sometimes, you fear your money will get delayed due to a late property sale. In that case, you can avoid agreeing upon a fixed date.
Difference between closed and open bridging loans:
Some basic features explain how both open and closed loans differ. You need to know these terms to finalise which loan you want to get. Without insider insights, you may end up choosing the wrong loan type. Therefore, pay heed to these terms.
Interest rate:
You may know that any finance you borrow from someone comes with an additional repayment price you must pay. That’s called an interest rate. You might pay it along with your loan instalment monthly or yearly.
Open bridging loan have much higher interest rates than closed ones. That’s because the lender is at high risk with this type of loan. As you haven’t defined the closing date, the repayment gets delayed and can take much longer. Due to these risks, the borrower must agree to a higher interest rate.
On the other hand, a close one is much cheaper because its interest rate is low. Moreover, due to its set date, there isn’t much risk involved.
Loan penalty:
Sometimes the borrower goes through a mental breakdown due to extreme pressure to pay the loan amount before the deadline. In the case of closed bridging finance, you must procure the money in time; otherwise, you get penalties on the loan amount. These increase your repayment, and you can’t do anything other than pay a hefty chunk of money.
However, you can avoid penalties with an open loan as it doesn’t set any payment deadline for your loan.
Availability:
Lenders only provide loans when they know they will get back the finance they give to the borrowers. Therefore, they go for the safest passage to keep their finance streams smooth and seamless.
Hence, with a closed loan, lenders get a repayment guarantee. Therefore, they readily provide this type of loan. So, you can quickly get a closed loan.
On the flip side, open loans are hard to get because they don’t contain a set time frame that guarantees repayment. Moreover, lenders usually avoid these loans because they fear losing their money.
Which loan is the best?
It’s hard to answer this question in a single sentence. The reason is that every individual or company has different financial goals. So, their loans option vary from one another. Therefore, the only way to find the best loan is to assess your finances first.
Then, you can see which option resonates with your needs. For example, an open loan can be a good choice if you want better flexibility. Similarly, if lower interest rates appeal, you can get a closed bridging loan. You can also visit P2P lending platforms to get such loans.
