Definition: A Bridge Loan is a temporary short term loan usually used by a person to finance a new house before the sale of the existing or the old one. Simply, a loan is taken till the permanent financing is arranged. It is also called as Interim Financing or Gap Financing or Swing Financing.
A bridge loan is generally raised to bridge the gap between the times the finance is needed. Sometimes the old property is not sold and in the meanwhile the urgent requirement of funds arises to finance the new property, and then a bridge loan is used to cover this time gap.
A Bridge Loan is a short term loan usually for six months and can be extended up to 12 months. These relatively possess high-interest rates and are given against any collateral security. A person is entitled to a bridge loan only when he has a contract to sell his old or existing house.
Since, there is no surety of time, i.e. when the existing property or the house will be sold, the bridge loans are much riskier and costly as the high interest is to be paid until its maturity.
If the borrower makes the full payment of a bridge loan before its expiry, then no extra interest is to be paid to the bank. But however, if the loan is paid too early then the borrower may have to incur the prepayment penalties.