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From Adviser Guide: Short-term finance

Q: What are the different types of short-term loan?

The best known short-term loans are known as bridging loans.

By Emma Ann Hughes | Published Jun 28, 2012 | comments

The best known short-term loans are known as bridging loans.

As the name implies, bridging loans are used principally to provide a funding ‘bridge’ for the purchase or refinancing of a property asset, prior to being repaid either from a sale or where property is bought at discount requiring immediate settlement before a mortgage can be put in place.

There are two distinct types of short term bridging loans.

Firstly, there are those that are regulated by the FSA.

These are secured by first charges against property which is currently or will be occupied by the borrower or their close family, according to Alan Margolis, head of bridging at United Trust Bank.

Secondly, there are unregulated loans which are usually secured against residential investment properties, commercial properties, or mixed use properties such as shops with flats above - provided the FSA’s residential qualification is not met.

Most second charge loans fall into this category although some second charge loans may be regulated by the Consumer Credit Act, Mr Margolis said.

There are many uses for short term bridging loans. For instance, Mr Margolis said a common use is enabling borrowers to downsize.

In these situations, Mr Margolis said borrowers wish to purchase a smaller property before they have sold their existing larger home.

They take out a loan secured against the existing home enabling the borrower to downsize. The loan is repaid from the sale of their existing larger home.

Personal asset lending, where clients use valuables such as diamond jewellery, gold, prestige cars, fine art and antiques, and other high value assets, to secure a short-term loan, has become increasingly attractive, according to Paul Aitken, chief executive of Borro.

Mr Aitken said personal asset lending appeals to individuals requiring immediate and discrete funding without the hurdles, such as credit checks and in depth income and expenditure analysis put up by conventional lenders.

Loans are usually for one year and carry no early redemption penalties or other charges.

Another short-term option, for those who are unable to use traditional personal loans due to past credit issues, are no-credit-check loans.

Otherwise known as guarantor loans, Mr Aitken said such borrowing involves a parent, family member or very close personal friend can act as a guarantor for the loan.

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