What is a Bridge Loan?

Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is “Bridge Loan”
A bridge loan is also known as a “Swing Loan.” It helps you bridge the gap when
you have more than one obligation. It is usually a loan made against the current home, which
has not yet been sold, to fund the down payment on a new home. The loan gets paid when the
first home is sold. It is typical in real estate.
A bridge loan is a short-term loan that is used until a person or company secures permanent
financing or removes an existing obligation. This type of financing allows the user to
meet current obligations by providing immediate cash flow. The loans are short-term (up to
one year) with relatively high interest rates and are backed by some form of collateral
such as real estate or inventory. As the term implies, these loans “bridge the
gap” between times when financing is needed. They are used by both corporations and individuals
and can be customized for many different situations. For example, let’s say that a company is doing
a round of equity financing that is expecting to close in six months. A bridge loan could
be used to secure working capital until the round of funding goes through. In the case
of an individual, bridge loans are common in the real estate market. As there can often
be a time lag between the sale of one property and the purchase of another, a bridge loan
allows a homeowner more flexibility.

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