When it comes to finance at short notice, two options reign supreme; bridging loans and personal loans. Both forms of finance allow borrowers to raise money quickly, often to cover the shortfall of an unexpected cost, and they tend to have very short loan terms. However, as they are both strong options in their own right, it can be difficult to decide which is best for your situation. In times when you need money fast, time spent struggling to decide between two options is certainly time wasted.
In this article, we will provide an overview of bridging loans vs. personal loans, break down the key differences between the two options, and make sure you have the information you need to make the best decision for you. Let’s get started.
What is a bridging loan?
Bridging loans are a type of loan categorised as secured finance. As a secured loan, bridging loans require physical assets to be used as collateral as part of the loan agreement. This categorisation significantly impacts how they work, for good and ill. As a result of this collateral requirement, bridging loans have a simple and streamlined application process compared to their counterparts. This allows borrowers access to capital at unparalleled speeds, and a great degree of flexibility in terms of how much can be borrowed and what the money can be used for, though borrowers must have assets of sufficient value to secure their desired loan.
This is in contrast to other types of finance, which place a heavy emphasis on credit scores, personal income, and so on. These advantages make bridging loans a stand-out choice when in need of large sums of money at short notice, and this is the reason behind their popularity in the property development industry.
While the requirement of collateral brings with it the above benefit, there is a certain level of risk that follows. Once the borrower agrees to use one or more assets as collateral, the lender will place a lien on these assets. This lien allows the lender to seize any assets used as collateral, up to the value of the loan that remains outstanding. Naturally, this poses a much higher level of risk to borrowers compared to unsecured loans, even more so for those in an unstable financial position. If a vital asset is repossessed, such as a vehicle or home, it can have a disastrous effect on the borrower’s finances and potentially set them down the path of personal bankruptcy. As such, it is vital to exercise caution when taking out a secured loan of any kind.
Also Read: Is It Possible To Use a Bridging Loan For a House Purchase?
Pros and cons of bridging loans
Bridging loans offer borrowers a bunch of major advantages. First and foremost is flexibility, both in how much can be borrowed and in the applications. Essentially, borrowers can take out loans without an upper limit, provided they have assets of sufficient value. As assets are the main focus of a bridging loan application, borrowers can also enjoy a very quick and to-the-point loan application. This allows borrowers to raise large sums of money in as little as a couple of days, which is a level of responsiveness hard to find anywhere else. This capital can then be used to fund a wide range of projects or purchases, from the purchase of property to the construction of a new build, and almost anything in between.
While certainly advantageous in some regards, bridging loans are not all positive. As we mentioned, a significant con to bridging loans is the comparatively high risk posed to borrowers. The short-term nature of bridging loans accentuates this risk. Most loans have a term shorter than 12 months, with some lasting only a few months in total. Though this is a purposeful feature of bridging loans, it isn’t a feature that makes things easy for some borrowers. Additionally, bridging loans are typically more expensive than other loans, as interest rates are a fair bit higher compared to their counterparts.
Also Read: What Is an Unregulated Bridging Loan
What is a personal loan?
Personal loans are a viable alternative to bridging loans, offering borrowers a means of raising money fairly quickly. Unlike bridging loans, they are unsecured loans, meaning they do not require any assets to be used as collateral. This does greatly reduce the risk borrowers must face, though credit scores will still be affected should any payment issues arise.
Pros and cons of personal loans
There are a few notable pros to using personal loans. Firstly, personal loans are a much more long-term solution than bridging loans. Whereas bridging loans usually last less than 12 months, personal loans have this time frame as a minimum. Borrowers can take out a loan between one and seven years, giving much more breathing room to make repayments. Some personal loans can even last up to 12 years, though this isn’t a common occurrence, and depends on the lender. Despite this longer period, borrowers can use personal loans to raise money quickly. However, the greatest advantage of using a personal loan is the comparatively low risk. Unlike bridging loans, personal loans do not require any form of security. If borrowers fail to make repayments, they don’t risk losing their assets.
Also Read: Bridging Loan vs. Hard Money
There are drawbacks to using personal loans, however. One of the most significant is the cost. As personal loans are unsecured loans, most lenders will charge a premium in interest rates to act as a safeguard. If you take the full term to repay the loan, you’ll end up paying a fair amount on top of the initial amount. Furthermore, you might find that there are additional fees to pay, like a closing fee or early repayment fee. The last major downside is the size of personal loans. While this doesn’t have to be a negative, personal loans typically have an upper limit of £50,000. If you need a large amount of cash, personal loans likely won’t be able to accommodate you.
Which is best?
The best loan of the two heavily depends on your situation. If your personal finances are rocky and you find yourself at risk, bridging loans likely won’t be the best fit. In this case, a personal loan might be able to give you the financial edge you need to cover an immediate cost. However, if you need a large amount of money, such as to purchase a house, a bridging loan is more likely to be suitable. As always, it is strongly advised to carefully consider your situation, and consult a professional for advice.