Bridge Loan

Why Bridge Loans Matter

Bridge loans are valuable in property deals where timing is key. In India, 74% of bridge loans support new home purchases before selling existing ones. This helps avoid missed chances due to cash flow issues. With loan-to-value ratios of 60–80%, borrowers can access much of their property’s value. They can also set up repayments to match future asset sales. Businesses use bridge loans to keep cash flow steady during growth, ensuring operations run smoothly while waiting for long-term funding.

Key Limitations of Bridge Loans

Bridge loans can be costly. Interest rates usually range from 12–18%, while traditional home loans are 8–9%. Processing fees are often 1–3%. For instance, a ₹50 lakh bridge loan for six months at 15% interest leads to ₹3.75 lakh in interest, totaling ₹53.75 lakh to repay.

Collateral risk is a big concern since 92% of bridge loans need property mortgages. Borrowers who can’t repay risk losing their assets. Also, 66% of bridge loans require repayment within 12 months, pushing borrowers to sell quickly, which may lead to bad deals.

Practical Tips for Managing Bridge Loans Effectively

To lower risk, plan your exit first. Make sure the sale or refinance timeline matches the loan period to avoid stress. For example, selling a ₹1 crore property should cover a ₹65 lakh bridge loan (including principal and interest).

Use bridge loans only when the return on investment is higher than borrowing costs. If a property is expected to grow at 25% CAGR, paying 15% in interest might be worth it. If growth is uncertain, look for other funding.

Borrowers can also negotiate flexible repayment plans, like paying only interest until selling the asset. For example, on a ₹50 lakh loan at 15% interest, paying monthly interest of ₹1.25 lakh can ease cash flow.

Keep a collateral buffer by pledging assets worth 25% more than the loan. This can help with approval and lower interest rates. Digital tools, like Bajaj Finserv’s loan monitoring apps, help borrowers track daily interest. A ₹50 lakh loan at 15% builds up ₹20,548 in daily interest.

Final Thoughts

Bridge loans are becoming popular in India, with 22% growth among SMEs in 2024 and average loans of ₹82 lakh in metro areas. However, 38% of borrowers face repayment delays due to property sale issues. This highlights the need for careful financial planning. Borrowers should use realistic forecasts, keep liquidity buffers, and align exit plans with loan timelines to ensure smooth repayment and avoid financial trouble.