Consumers struggling to make ends meet in the wake of the coronavirus pandemic are slowly being given access to hardship loans offered by banks and credit unions. Some of these loans are being presented as bridge loans by marketers and media outlets. But are they?
If your definition of a bridge loan is simply a loan that bridges the gap between expenses and income, you could make the case that coronavirus hardship loans are actually bridge loans. But if you follow the classic definitions the financial services industry has used for years, then hardship loans are something entirely different.
A Way Around Unemployment
A recent CNET report describing coronavirus hardship loans explains that they are intended for people struggling with unemployment. With tens of millions of people in just such a predicament, unemployment insurance may not be enough to make ends meet. A hardship loan can ostensibly help by providing cash loans at reduced interest rates and with very generous repayment terms.
Here is why they are not bridge loans according to the traditional definition:
- Loan amounts are quite small
- Terms can be as long as 60 months
- Approval requires good credit
- Borrowers have to prove an ability to repay.
When you step back and look at all the finer details, a coronavirus hardship loan looks more like a personal loan than a bridge loan. That is not to say that such loans are a bad idea. They may be immensely helpful to people struggling through temporary unemployment. But hardship loans are not bridge loans.
Defining a Legitimate Bridge Loan
Like hardship loans, a bridge loan is intended to bridge the gap between expenses and income. However, bridge loans are defined by specific parameters. First and foremost is collateral. Salt Lake City’s Actium Partners explains it very well.
When Actium Partners writes a bridge loan for a client, they do so only after the client offers some sort of collateral as security. Said collateral is, more often than not, a piece of real estate with a first lien position. Most clients will offer a property they are trying to buy or one they already own in full.
Bridge loans for residential housing work the same way. Borrowers offer the home they want to buy as collateral to secure the funding necessary for purchase, planning to repay the loan with the proceeds from the sale of their existing home.
Credit Checks and Income Verification
The other thing that makes legitimate bridge loans unique is how private lenders go about approving them. Where a bank goes through ‘normal’ procedures – i.e., credit check, employment check, income verification, etc. – private lenders rely almost exclusively on the value of collateral to render a decision.
If a private lender runs a client’s credit, it is only to determine rates and terms. Those with better credit get the best rates and terms. But in regard to the decision to lend, it is based on the value of collateral. This has a variety of implications covering everything from loan amount to the time it takes to get a loan funded.
It is understandable that marketers and media outlets would portray coronavirus hardship loans as bridge loans. They do, indeed, bridge the gap between current expenses and future income. But when you understand what a bridge loan is in industry terms, it is clear that hardship loans do not qualify.
Hardship loans are personal loans designed to help people get through the COVID-19 crisis. They are offered through banks and credit unions. Bridge loans are private loans, mainly for real estate deals, and are based on collateral.