Bridging loans can be defined as financing available for individuals or businesses that need the money between two transactions. Bridging loans have the appeal of letting people buy a new residence before they sell an existing home and for anyone who needs cash quickly to take advantage of an opportunity. However, what is the story when the borrower cannot make the payments on the loan as expected? If you are experiencing this, you must know the repercussions and how to handle the problem.
What is a Bridging Loan?
First, let us discuss what a bridging loan means before discussing the possible consequences of failing to repay this kind of loan. A bridging loan is a short-term loan that ‘bridges’ the área between buying a new property and selling another. These loans are provided as a cash advance, generally taken against the property, and are repayable over the shortest time possible, as within one year or six months.
What Happens If You Can’t Repay Your Bridging Loan?
1. Interest Penalties and Fees
Notably, repaying a bridging loan on the wrong date will attract interest charges will be levied. Bridge financing is usually more expensive, and the higher interest charges make such loans expensive, the longer one takes to pay it back. Failure to make a repayment can also mean a rise in the total amount payable.
- Higher Costs: Your debt rises each day by an interest amount.
- Penalty Fees: Late payments may attract other extra charges from the lenders.
This may lead to a situation where you amass a large amount of money that might be hard to pay out when it’s due.
2. Secured Asset Risks
Bridging loans are mainly secured: they are given with an asset such as real estate as collateral. If you fail to repay the loan, the program has a legal basis in seizing the asset pledged as collateral. This is usually the home or asset you want to sell.
- Repossession: If you fail to repay, the lender may proceed to seize the property to recover the loan amount.
- Foreclosure Risk: Such scenarios in the case of property may lead to foreclosure, which means the property is lost.
It is typically lenders’ last probable step when they cannot regain the balance. However, repossession does have an impact on your financial future and your creditworthiness.
3. Damage to Your Credit Rating
Bridging loans is less expensive than other loans, but your credit score will be significantly lowered if you cannot repay the loan. Defaulting or failure to make payments on a bridging loan is usually communicated to credit reference companies. Consequently, their credit rating decreases, complicating further borrowing, such as loans or mortgages.
- Reduced Credit Score: A lower score implies that you are likely to be blacklisted in any borrowing agency in the future.
- Higher Future Borrowing Costs: You may be considered high risk by the lenders, and they will charge higher interest rates in the future.
This long-term consequence can hamper your approach when it comes to trying to get funding for other purposes.
4. Legal Consequences
In some circumstances, the lender might recover their money through a court of law because the borrower cannot repay the loan when due. This could entail issuing you a notice and initiating legal proceedings to recover your owed amount.
- Court Action: The lender may take legal action against the borrower for defaulting on the loan.
- Debt Recovery: When the borrower refuses to repay the loan, the lender can go to court and get an order to garnish the borrower’s bank account.
Legal action exposes the parties to financial stress as legal costs stack up.
5. Increased Debt
If the lender has not been able to fully recuperate from the sale of your property or in any other way, then the overall balance remains to accumulate. With the higher interest rates that bridging loans attract, it is easy to have the amount owed rise very quickly.
- Compounding Debt:Â Interest is compounded, which causes the total amount to be larger after a specific period.
- Debt Collection Agencies: If the lender cannot recover the loan, they take it to a collection agency that might be more forceful in the recovery process.
The Bottom Line
In conclusion, non-payment of a bridging loan on time is detrimental since one can lose all their wealth and face a legal suit. From getting back the green light for civil judgments to even destroying credit scores, being informed of many threats can be crucial. However, if you remain active in telling your lender that you cannot meet those demands, you may be able to work out how to solve it before getting out of hand. In addition, if you are caught in a tricky financial situation, you can go for refinancing, sell your properties, or even get help from professionals who can manage your debts well.
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