Taking out a bridging loan is a great option if you are seeking short term finance. And, if you pay off the loan within the set payment period, you could even see an improvement in your credit rating score. Defaulting on your finance, failing to follow through with your exit strategy or breaching the terms of agreement, however, not only has a negative effect on your credit score but can result in more serious implications such as country court judgements and even property repossession.
Does a bridging loan affect your credit score? A bridging loan can affect your credit score. However lenders are not primarily concerned with credit scores but will run credit rating checks on their applicants. If you are unsuccessful in applying for a bridging loan, then this will show on your credit file.
This should not deter you from shopping around for bridging loan finance, however, as many lenders will give an “in principle” agreement to a loan which does not show on your credit file.
Here we explain the implications that bridging loans can have on your current credit ratings.
How your credit rating could be affected by bridging finance
Bridging loans can offer a lifeline for those who need assistance in “bridging the gap”, between a debit and credit payment. These types of loans are normally used for house purchases and renovations in order to help facilitate the completion of purchasing one property before another is sold or to restore it to its maximum potential.
It is important to weigh up the pros and cons of taking a bridging loan as they do come with higher than average interest rates, a host of administration fees and can affect your credit score and borrowing options for the future.
That said, bridging finance is like any other form of short term debt, and although you might see your credit score decrease for the duration of the loan, providing you follow the terms and conditions of the agreement and pay off the loan in the specified time, you should see your credit rating rise again. And, for those who may have had a poor credit score to begin with, a bridging loan can actually be seen as a real advantage.
Bridging loans come with a host of other benefits and can be arranged within a short space of time. They are great for those looking to borrow large sums of money and come with flexible borrowing and repayment plans.
The risks of taking bridging finance
Things do not always go to plan and it is important to understand the potential risks when taking out bridging finance. This way you can ensure that you safeguard yourself against the worst case scenario and protect your assets, reputation, and credit rating score. These include:
- Defaulting on your payment – As bridging finance is an asset backed loan, when you default on your payment, your personal assets are instantly put at risk. Failure to pay can result in your bridging loan lender legally demanding payment via county court judgements and statutory demand letters – both of which will have a major impact on your credit rating.
- Not following through with your exit strategy – An exit strategy is the plan you have in place to repay your bridging loan plus any interest and administration fees at the end of the term agreement. This usually includes the selling of property, shares, or investments. However, the housing market can be volatile, so it is always worth having a contingency plan in place or borrowing for longer to ensure that you factor in any circumstances outside of your control. Failure to repay your loan could see the lender repossessing your property, leaving you with significant financial loss and damage to your credit history.
- Breaching the T&Cs of your bridging loan – Most bridging loans are (as yet) unregulated with means that lenders can create their own terms and conditions when it comes to fees, payments, and charges due. It is really important that you read through the fine print thoroughly to check that you do not breach them during the various stages of your bridging loan.
Minimise your credit risk when taking a bridge loan
The best way to minimise risk when taking out a bridging loan is to go to a reputable lender such as Bridging Options, where you can enjoy access to some of the best bridging loan rates on the market.
It is important to look around at different lenders, as the difference in terms, conditions and costs can vary considerably. Just remember that where possible you should aim to get an “agreement in principle” before completing on your bridging loan as this will give you an idea of the loan size you are eligible for. Alternatively, why not take a look at our online bridging loan calculator to see just how much you can borrow?
Unless you are sure that you are happy with the proposal you should always make sure that a soft credit check (also known as a quotation search) is run beforehand. Unlike a hard credit check that will leave a footprint on your credit record, a soft check will not be seen on your credit file.
Finally, always read the small print and do your due diligence so that you are never liable for any extra costs or worse still, stand to be in breach of your loan agreement. At Bridging Options, our team of experts are well versed in talking through the finer details and can explain, in laymen terms, the complex legislations so that they are clear and transparent.
What to do if you cannot repay a bridging loan
Even the most responsible borrower with a great credit rating and excellent reputation can find themselves in the unfortunate situation of being unable to settle their bridging loan debt – quite often due to circumstances outside of their control.
A good bridging loan lender should keep in regular contact with their borrower in order to check that projects are going to plan. If you know in advance that you will be unable to honour the original bridging loan agreement, then you must declare it immediately.
Providing you are open and honest with your lender, then you stand a much better chance of retaining the assets you have used as security.
If you are unable to come to alternative arrangements with your lender, then you may need to seek other funds.
Getting the best bridging loan for your credit rating
Quite often it is said that rather than avoid risk completely, you should only take intelligent risks that reap rewards. This is why at Bridging Options we consider each applicant on a case for case basis, ensuring that our borrowers take calculated bridging finance decisions that are guaranteed to increase their benefits whilst keeping risks to a minimum.
So why not give our experienced team of independent brokers at Bridging Options a call ,for a free, no obligation telephone consultation. Alternatively get in touch by completing our online enquiry form today.