Need a million pounds by next week? Just put in on your credit card, pay off the monthly minimums and voilà, problem solved.
But is it? While using credit cards to access liquidity immediately is one option, it’s an expensive route. You’ll need to make the monthly minimum repayments on your card, and you’ll be charged interest on the remaining amount every month until you pay off the loan. Interest rates vary, but APR can often sit at more than 20% on the remaining amount you owe - plus your usual credit card fees.
The cost of borrowing money will rack up quickly. It’s difficult to understand how much you’ll pay for the privilege of borrowing money this way. Credit card charges are notoriously hard to understand, and it’s easy to think you’ve done your maths right, only to find you need to pay back considerably more than you thought.
Many people use overdrafts for the same reasons – to access capital quickly. Unauthorised overdrafts are exceptionally expensive. Authorised overdrafts are less pricey, but interest on an overdraft generally comes in at around 20%, but only if you have a pristine credit score. Fees can very quickly hit 35%+ if not, making overdrafts more expensive than credit cards. Again, other fees may come on top of any interest you pay.
Borrowing via credit card or through an overdraft is sometimes eye-wateringly expensive – more so than other types of lending. So why do high-net-worth individuals (often people who are very financially savvy and well-advised) do it? The answer is almost always because they need near-immediate access to capital. In other words, time is of the essence.
Often, credit cards or overdrafts are one of the fastest ways to access liquidity for a variety of purposes. Often, they are used to solve a short-term liquidity problem or to pursue an opportunity that funding via other types of loan would take too long to organise.
Bridging loans can be an ideal – and significantly cheaper – alternative.
Bridging finance differs from most other loans in how quick they are to set up. With proper support, you can receive offers very quickly, often in as little as 24 hours. All players involved in bridging finance can and will move quickly, meaning deals can often be done within a week, and you can sometimes draw down funds in as little as seven days.
A bridging loan is secured against a property you own (but not one you necessarily live in), but it doesn’t have to be used to purchase a property or invest in real estate, although it can be if you wish. Instead, you can use a bridging loan to lock in opportunities, finance diverse assets or investments, grow a business, pay off a loan, buy land or property – the scenarios are nearly endless.
As long as your lender is on board with your plans, you won’t be limited to deploying your capital where your property is – you can use the proceeds of the loan for international and domestic projects.
Whenever you want to borrow significant capital, it is always worth structuring the deal carefully. Bridging finance packages are always hand-built to meet your requirements. They will often be more tax-efficient, less expensive, and have more flexible and beneficial terms than borrowing through a credit card or an overdraft.
The interest rates on bridging loans tend to be significantly less expensive than a credit card or overdraft, although what you pay will vary.
The lowest interest rates start at around 3-5%. Private banks can offer rates this low, although to benefit from such low rates, you’ll usually need to have a relationship with the bank or put assets under management with the institution.
Mainstream banks and building societies offer interest rates in the 5-10% range, although not every institution will lend in every scenario. Many mainstream lenders still prefer offering bridging finance for ‘pure’ property transactions: allowing you to buy a new house before your old home is sold, breaking a property chain and so on. They can sometimes be less open to financing more complex scenarios or lending so you can pursue an opportunity, invest, solve a problem and so on.
If you are looking to do any of the above, alternative and non-bank lenders tend to be the best port of call. They offer very competitive rates and are open to financing a variety of deals – they are generally far more open to you using your loan for diverse projects and investments, solving problems, complex transactions or aggressive (but viable) plans. What your bridging loan will cost will depend on your requirements, including the real estate at the centre of the deal, how much you are looking to borrow and how you want to deploy the capital.