Occasionally people get caught in the middle of investments that need an infusion of cash in a timely manner and traditional financing is not available for one reason or another. This is where a hard money loan or a bridge loan would be the answer and might be worth pursuing.
Bridge loans are a type of hard money loan that is generally used for real estate investments when no other source of income is available. As such, they are offered by private investors and not banks and traditional lenders. Most individuals for example who receive such type of loans apply when they are selling one house and need money now to finance, or move into, a new home, but cannot wait for their original house to sell. Hence, a bridge loan “bridges the gap” between the time that the house sells and the loan can be repaid.
Businesses also consider them during construction projects. A business can apply for a standard loan from a bank, but approval can take up to several months. By procuring a bridge loan from a private investor, the business can continue its project uninterrupted. Herein lies a major difference between a bridge loan and a hard money loan; the former is designed for use and re-payment in a very short period of time, such as a number of months or a year, whereas a regular hard money loan might take longer to pay back.
As such, interest rates are somewhat higher for hard money loans than they would be for traditional loans, and even higher for bridge loans. Although interest rates might be higher for these loans, to correspond to the risk involved for the lender, and for the convenience afforded to the borrower, statistics suggest that higher rates are more of a myth than a reality. For example, lenders have pointed out that, as short-term loans, hard money and bridge loans are almost equal in interest rates to traditional loans when averaged out against the amount of time it takes to pay for them.
In addition, although hard money lenders make it possible for people who might not qualify for traditional loans to receive one by treating their property as equity instead of relying on credit scores, they are also a convenience for people who can qualify for traditional loans. Essentially, the question to ask before deciding on whether to get a hard money or a bridge loan is how long one needs to pay it off.