Bridging loans can be a useful tool for short-term financing needs. However, it’s crucial to understand the potential impact on your credit score. While timely repayments can boost your credit rating, defaulting on the loan, failing to execute your exit strategy, or violating the terms of agreement can severely damage your creditworthiness and lead to serious consequences, including county court judgments and property repossession.
Even though lenders are not overly concerned about credit scores they do conduct credit checks when you apply for a bridging loan, which may temporarily impact your credit score. However, seeking an in-principle agreement from multiple lenders typically doesn’t affect your credit file.
To minimise the potential negative effects of bridging loans on your credit score, consider the following:
Thorough Research: Before applying for a bridging loan, carefully research and compare different lenders, interest rates, and terms.
Repayment Plan: Ensure you have a realistic and manageable repayment plan that allows you to make payments as and when required.
Exit Strategy: Clearly outline your exit strategy for repaying the bridging loan within the agreed-upon timeframe.
Compliance: Adhere strictly to all the terms and conditions of the bridging loan agreement.
Seek Professional Guidance: If you are unsure about any aspects of bridging finance it is advisable to get professional help from a financial advisor or broker.
What Ways Can Bridging Finance Affect your Credit Rating
Bridging loans can serve as a valuable resource for individuals looking to bridge the financial gap between a debit and credit payment. These loans, in the form of residential bridging loans, are commonly utilised when buying or renovating a house. For example if you have seen a house you want but haven’t yet sold your own property or want to buy a house that is currently unmortgageable until renovations are completed. Bridging finance can provide you with funds to do that.
If you are a business owner looking to expand your business, there are also commercial bridging loans available that can use used to suit your business’ needs.
It is imperative to carefully assess the advantages and disadvantages of opting for a bridging loan. These loans typically entail higher-than-average interest rates and involve various administrative fees. Moreover, they can impact your credit score and future borrowing opportunities.
Nonetheless, bridging finance operates like any other short-term debt, and although your credit score may temporarily dip during the loan period, keeping to the agreed-upon terms and repaying the loan within the specified timeframe can actually help improve your credit rating. For individuals with prior credit challenges, a bridging loan can prove to be a significant asset.
Bridging loans offer a range of additional benefits and can be swiftly arranged. They are particularly advantageous for those in need of substantial sums of money, featuring flexible borrowing and repayment options. Contact Pyxis Capital today to discuss your options, or to begin your bridging loan journey.
Are there Risks Associated With Bridging Finance
Before committing to a bridging loan, it’s essential to understand the risks involved. Being aware of the pitfalls will undoubtedly help safeguard your assets, reputation, and credit score. Here are some key risks to consider:
Defaulting on Repayments:
Because a bridging loan is secured against your assets defaulting on repayments could put them at risk. Failure to pay can lead to legal action from the lender, such as county court judgments and statutory demand letters, both of which can damage your credit rating.
Unsuccessful Exit Strategy:
An exit strategy outlines how you intend to pay back the bridging loan, including interest and administration fees, within the agreed-upon term. This typically involves selling the property concerned or other investments.
However, market fluctuations can make this challenging. Having a contingency plan or extending the loan term can help mitigate unforeseen circumstances. Failure to repay could result in property repossession, causing significant financial loss and significant damage to your credit score.
Breaching Terms and Conditions:
Most bridging loans are currently unregulated, allowing lenders to set their own terms and conditions regarding fees, payments, and charges. It’s vital that you read the fine print to avoid breaching any terms during the loan period.
How to Minimise Risk When Taking Out a bridging Loan
Probably the most important step you can take when considering a bridging loan is to do thorough comparison of various lenders since terms, conditions, and costs can vary significantly. Whenever possible, get an “agreement in principle” before finalising your bridging loan, as this will provide an estimate of the size of loan you could be entitled to.
To avoid any unwelcome surprises, it’s wise to ensure a soft credit check (also known as a quotation search) is performed beforehand. Unlike a hard credit check, which leaves a trace on your credit report, a soft check remains invisible on your credit file.
Lastly, always carefully review the terms and conditions, and conduct your due diligence to prevent unforeseen charges or, worse still, potential breaches of your loan agreement.
If possible, we would always advise consulting a finance expert. By using our extensive experience and knowledge the team here at Pyxis have helped numerous clients successfully apply for bridging loans and get the best deal possible.
If you want to quickly run the numbers and see how a Bridging Loan might look for you, then why not use our Bridging Loan Calculator?
What You Should do if you are Unable to Repay a Bridging Loan
Sometimes because of factors outside their control even the most responsible borrowers, who have an excellent credit rating can find themselves in the unfortunate situation of being unable to meet their bridging loan obligations.
Any responsible lender should maintain regular communication with their borrowers to ensure that projects are proceeding as planned. If you find that you cannot make the payments outlined in the original bridging loan agreement, it is imperative that you notify the lender as soon as possible.
Being forthright and transparent with your lender significantly increases your chances of safeguarding the assets you’ve offered as collateral.
If alternative arrangements with your lender cannot be reached, it may be necessary to explore alternative funding sources.
If you think that you may benefit from a bridging loan but are unsure about how to process, don’t hesitate to call the team here at Pyxis Capital, or fill our our quick and easy enquiry form and a member of the team will get back to you as soon as possible.
Conclusion
In conclusion, while taking out a bridging loan may have some impact on your credit score, it will not necessarily be a negative one. As long as you make repayments on time and adhere to the terms of the loan, any potential dip in your credit score is likely to be a temporary one.
Moreover, for those with a less-than-perfect credit history, successfully managing a bridging loan can actually help improve your creditworthiness over time. The key lies in understanding the terms of your loan, being diligent in your payments, and choosing a reputable lender. So, a bridging loan’s impact on your credit score largely depends on how responsibly you manage it.
Contact Pyxis Capital today to discuss all things Bridging Loan either via our quick and easy enquiry form, or directly on 01257 543072