Bridging loans are a type of loan that has seen a substantial uptick in use over recent years. This is especially true for property developers, as the benefits of bridging loans provide a significant advantage in such a competitive industry. With a bridging loan, property developers can raise large amounts of capital in a very short space of time, all while having a high degree of flexibility. However, not all bridging loans are the same, with two main categories offering loans with notable differences. Unregulated bridging loans are one of these categories.
What is an unregulated bridging loan?
Unregulated bridging loans are one of two main categories of bridging finance, acting as the counterpart to regulated bridging loans. They are a type of secured loan, requiring physical assets to be used as collateral in order to take out the loan. In essence, this is what enables the excellent advantages boasted by bridging loans, as it allows the application process to be much quicker than its competitors. Credit history, income, and the other usual requirements are brushed aside in favour of the value of collateral assets, though they do still play a small part. This makes the application much quicker, allowing for capital to be raised swiftly and benefit from increased flexibility.
However, this is a double-edged sword. While requiring collateral assets makes for a more straightforward application process, it also constitutes a higher risk for borrowers. Once a loan application has been approved, the lender will place a lien on assets used as collateral. This lien entitles the lender to seize assets as a form of payment, in the event the borrower cannot keep up with repayments for any reason.
While this might not be particularly risky for borrowers with secure finances, it may pose an unmanageable risk for borrowers in an unstable financial position. This risk can be further accentuated by the very short term of bridging loans. Generally speaking, bridging loans last no longer than 12 months, with many having considerably shorter terms than that. The main aim is to tide borrowers over until they can find a long-term financial solution, rather than be a long-term solution themselves. This can put significant pressure on borrowers with rocky finances. As such, it is important to carefully consider your position and obtain professional advice.
Also Read: Bridging Loan vs. HELOC – Which Should You Use?
How to obtain an unregulated bridging loan?
Unregulated bridging loans are exactly that – unregulated. This means that lenders of such loans are not beholden to rules set by the FCA, or Financial Conduct Authority, and borrowers cannot expect any help from them should things go awry. Moreover, if you would like an unregulated bridging loan, you will have to look to methods other than the traditional banks and credit unions you might be used to.
Private lenders are typically where you will find unregulated bridging loans. They can run their own lending companies, or partner with loan hubs that specialise in putting lenders and borrowers with similar requirements in touch. Beyond this quirk, obtaining an unregulated bridging loan works much the same as it does for a regulated one. Namely, your chosen lender will require a series of information from you, with the most emphasis being placed on assets you intend to use as collateral. Assuming you have assets of sufficient value, or an exit strategy that can pay off the loan should you otherwise be unable to, you can expect your application to be approved in short order. In fact, unregulated bridging loans are considerably less strict than regulated bridging loans, making it a bit easier to obtain one.
Also Read: Bridging Loan to Build a House
Advantages of unregulated bridging loans
There are several key benefits to using an unregulated bridging loan. First, they benefit from the same advantages as any other bridging loan. Namely, they can raise large amounts of money quickly, with very flexible loan agreements. That said, unregulated bridging loans add to these advantages, as lenders of such loans are not as restricted as others. This means that unregulated loan lenders can offer much higher amounts in as little as a few days, with essentially no ceiling to how much can be borrowed. However, your upper limit will depend on the value of your assets. Moreover, unregulated bridging loan applications are streamlined, making it one of the simplest and quickest application processes on the market.
How are unregulated bridging loans different from regulated bridging loans?
Although the two categories of bridging loans are very similar, there are a couple of main differences that set them apart. These differences mostly stem from the lack of regulation of unregulated bridging loans, making certain aspects of this form of finance work slightly differently than their counterpart. For example, unregulated bridging loans do not offer borrowers much in the way of protection at all. This grants unregulated bridging loans much more flexibility in terms of what can be offered compared to regulated bridging loans, but it comes with a higher level of risk.
In addition to this, the application process is less stringent for unregulated bridging loans. While this means it will be quicker for you to get a response, it also means that unregulated bridging loan lenders might lend to riskier borrowers. They won’t necessarily tell you how riskier a prospect they consider you to be, so this could increase the amount of risk you face. As with any bridging loan, the lender reserves the right to seize your collateral assets if you fail to repay.
Lastly, unregulated bridging loans can be much more varied in terms of interest rates, as they are set by the lender and not beholden to the guidelines of the FCA. This could mean that your bridging loan is significantly cheaper than others, but it could just as easily mean it is more expensive.
Wrapping up
All in all, unregulated bridging loans are the riskier sibling of regulated bridging loans, though they can offer borrowers more substantial benefits than their counterpart. Borrowers can benefit from a speedier application process and more flexible terms, but must assume a greater level of risk. As such, it is vital that you carefully consider your financial position and obtain the advice of a professional before taking action.