Bridging loans have become a reliable source of finance for small businesses and property owners in the UK.
The current economic conditions show that more people will resort to bridging finance to complete their property projects, avoid cash-flow issues and buy/sell the property.
A Mintel report states that the bridging market will likely rise by 44% from 2022 to 2027. These trends are positive, but still, there exists a need for more understanding for new borrowers.
After skimming through tons of case studies, we have come up with the most common mistakes people make while getting a loan approved.
This article is for you if you are considering getting a quick bridging loan. You will learn what those mistakes are and how to avoid them.
A Sneak Peek into Bridging Loans:
Bridging loans are popular short-term loans that help businesses and homeowners bridge the finance gap.
You can get a bridging loan from a P2P lending platform. Mostly, the collateral used for these loans are property.
These loans are useful when you need huge sums of money on short notice. As you know, you can’t get a mortgage in a short period. Thus, bridging finance has more benefits than mortgages.
One important thing to note is that bridging loans have high-interest rates and short duration. So, you will likely default if you don’t take care of these mistakes.
Common Mistakes to avoid with Bridging Loans:
Let’s find some common areas where you can commit mistakes while taking out a bridging loan. These mistakes occur throughout the whole process. You can easily identify and avoid them.
Narrow market knowledge:
This mistake occurs for both investors and borrowers. Novice borrowers can’t grasp the true market spirit. As they haste to find a lender, they don’t research for the best deal in the market.
The same goes for investors or lenders. People willing to lend their money for property often fall into the trap of low-value investments. That’s why they couldn’t get more options on their table.
It causes problems for borrowers to repay huge sums of money. For investors, it affects their profitability.
Instead of researching the market and wasting hours to find the best deal, you can use these two methods to solve this problem.
You can find a good broker who can open up various loan options. They can help you find a lender/borrower who matches your terms.
Apart from that, you can sign up for a P2P property lending platform. These platforms match your data with the desired deal. Hence, you can save time and get the best deal for you.
Missing out on costs:
Once you decide to go for bridging loans, you must list all costs. While it takes time and exposure to estimate possible costs in a project, you must try to fulfil all financial gaps beforehand.
As a property investor, you must find the right investment option. Finding the right investment means fetching a profitable project.
Different scenarios could help you understand this. For instance, the property after development must have a higher value that should cover your expenses after repayments.
Besides, the interest rate and repayments shouldn’t exceed your capacity. Thus, to make correct estimations, you should figure out all the costs.
These costs may require broker fees, valuation fees, stamp duty, and other costs. Also, you need to know the time of the project and inflation that may affect interest rates.
Failing to take this into account may affect your profits and cost you more in your bridging finance.
Unclear exit plan:
An unclear exit strategy may lead you to hot waters. An exit plan is a strategy you define to show your lender how you would repay the loan.
Another thing that is important to note is that you must comply with the exit strategy. If you have shown an exit strategy but don’t believe in it, you will find it hard to repay your loan.
Moreover, an exit strategy can relieve you in terms of loan conditions. Mostly, new borrowers need help understanding the importance of an exit plan. That’s why they end up repaying huge sums or going out of budget.
Bad spending habits:
Getting your loan approved can be a huge success for you. You get the most awaited funds that you can use at different stages of property development or business.
But, the problem with most of the borrowers is that they don’t plan out their spending. It means they can’t priorities their loan money. As a result, they keep on treading the old path and spend money on less important tasks.
It may lead to greater expenses and shorter money in their pockets. Mismanaging their funds will eventually leave them running out of money. In such cases, even spending money can’t bring complete their projects.
Thus, as a new borrower, you must plan the cash-flows before even taking out the loan so that your money goes to specific areas where it ought to go.
Final Words:
Bridging loans are very lucrative borrowing options for businesses and individuals. Those who want to refurbish their property or buy a new house can get this loan easily in a short span of months.
The benefits of P2P lending platforms and bridging loans are enormous, but there are some areas where a new lender or a borrower must keep things clear.
Often people need to correct their planning out an exit strategy. Moreover, sometimes home buyers need help calculating the total repayment costs.
These mistakes can cause problems in taking and repaying loans. We have enlisted some of the most common issues faced by those who take bridging finance.
You must understand these mistakes to rectify them when you get a bridging loan. If you have gone through this article, let us know your feedback in the comment section. We would love to know about your experience in bridging loans.
