When to Use a Bridge Loan vs Line of Credit

Quick answer

Pick a bridge loan when you need a rapid, one-time infusion of cash with a clear exit plan (sale of a property or fast refinance). Choose a line of credit when you want reusable borrowing capacity for ongoing or unpredictable costs, such as seasonal business shortfalls or rolling renovation work.

How each product actually works

• Bridge loan: A short-term, lump-sum loan secured most often by real estate or business assets. Terms typically run from several months up to 2–3 years. Lenders price them higher because they expect repayment or replacement quickly. Common uses include buying a home before the current one sells, covering construction carry costs, or providing liquidity during a refinancing gap.

• Line of credit (LOC): A revolving credit facility with a preset limit. Borrowers draw funds as needed and pay interest only on the borrowed balance; payments restore the available credit. LOCs come as unsecured personal/business lines, secured lines (including HELOCs), and securities-backed lines. They’re designed for repeated access and cash-flow smoothing.

In my practice I’ve seen bridge loans close deals that otherwise would fall apart because timing didn’t allow for a traditional mortgage, while lines of credit saved small businesses from payroll hiccups without forcing a long-term term loan.

When a bridge loan is the better choice

Use a bridge loan when all of the following apply:

• You have a specific, time-limited need for a lump sum (e.g., down payment on a new home).
• You can point to a credible exit strategy within the loan term (sale of an asset, committed long-term financing, or a refinance approval).
• Speed matters — the bridge lender can close faster than a conventional mortgage or term loan.

Typical scenarios:

• Buying a house before you sell the current one.
• Bridging the gap to permanent financing after construction (bridge-to-perm).
• Temporarily funding a business acquisition while long-term financing is lined up.

Advantages

• Fast funding and high approval flexibility.
• Can be structured to match a defined short-term need.

Drawbacks

• Higher interest rates and fees than permanent loans or LOCs.
• Short term means pressure to execute the exit strategy; default frequently triggers foreclosure or repossession if collateralized.

For deeper reader guidance on timing and exit plans for homeowners, see our guide on Bridge Loans for Homebuyers: Pros, Cons, and Exit Strategies.

When a line of credit is the better choice

Choose a line of credit when you need:

• Revolving access to funds over months or years.
• Predictable borrowing costs by drawing only what you need.
• A cushion for irregular cash flow rather than a one-time lump sum.

Common uses

• A small business smoothing seasonal revenue swings (see Small Business Line of Credit: How to Keep It Ready and Affordable).
• Staged renovation projects where costs arrive in increments.
• Emergency liquidity paired with an emergency fund.

Advantages

• Lower rates than most bridge loans, especially for secured LOCs (e.g., HELOCs).
• Repay and reuse structure reduces borrowing friction.

Drawbacks

• Lines can be reduced or frozen by lenders if credit quality weakens.
• Temptation to treat an LOC as extra cash can lead to persistent debt.

Costs, fees and tax considerations

• Interest: Bridge loans usually carry higher interest than LOCs because of shorter terms and higher risk. LOC interest varies widely by structure — unsecured rates are higher, secured HELOCs or securities-backed lines are lower.
• Fees: Bridge loans may include origination fees, appraisal fees, and exit fees. LOCs might have maintenance or non-use fees and periodic review fees.
• Taxes: Interest deductibility depends on how funds are used. For home-secured loans and HELOCs, IRS rules limit mortgage interest deduction based on use and loan type; consult IRS guidance at irs.gov and a tax pro before assuming deductibility.

Authoritative resources: Consumer guidance on credit products is available from the Consumer Financial Protection Bureau (consumerfinance.gov), and basic definitions and comparisons are described by financial education sites such as Investopedia.

Eligibility, underwriting and documentation

Bridge loans

• Lenders look for collateral (usually real estate), equity, and a credible exit plan.
• Documentation focuses on the exit source — a pending contract of sale, refinance commitment, or proof of other funds.

Lines of credit

• Underwriting depends on type: personal LOCs consider credit score, income, and debt-to-income ratio; business LOCs review revenue, cash flow, and business credit; secured LOCs require collateral valuation.

In both cases, expect a title search and appraisal for property-secured loans and standard identity and income verification documentation per lender and federal rules.

Exit strategy and risk management

A bridge loan without a credible exit strategy is high risk. Plan three elements:

1. Primary exit: sale contract, mortgage commitment, or refinance approval.
2. Backup plan: contingency funds, secondary buyer offers, or a bridge-to-term refinance.
3. Stress test: run numbers assuming a 3–6 month delay in your exit event.

For lines of credit, monitor usage and maintain a plan to reduce the outstanding balance when revenue recovers. If a lender warns of a credit line reduction, have alternatives (other lenders or cash reserves) ready.

Practical decision checklist (six questions)

1. Is the need one-time and time-limited? If yes, consider a bridge loan.
2. Is the need recurring or uncertain? If yes, an LOC is likely better.
3. Can you document a realistic, quick exit? Bridge only if yes.
4. Do you have acceptable collateral (real estate, securities)? That lowers LOC rates or enables a bridge loan.
5. How sensitive is your plan to interest cost? LOCs typically cost less over time if balances are managed.
6. What are the lender fees and penalties for early repayment or non-use?

Real-world examples

• Homebuyer: Found a new property and had an accepted offer contingent on quick close — a bridge loan let them fund the down payment and close while their current house was listed for sale.
• Small retailer: Used a business LOC each winter to buy inventory; repaid when sales spiked in spring. The LOC prevented multiple term loans and lowered financing costs.

Common mistakes to avoid

• Taking a bridge loan without a documented exit strategy.
• Treating a line of credit as extra savings — persistent balances mean steady interest costs and credit risk.
• Overlooking lender rights to call or reduce a line, particularly for unsecured or asset-backed lines.

FAQ (short)

• Can a bridge loan be used for non-real-estate needs? Yes — businesses and investors use bridge financing for acquisitions and short-term funding, but lenders expect a clear exit.
• What happens if I can’t repay a bridge loan? If collateral-secured, the lender may foreclose; unsecured defaults trigger collections and major credit damage.

Professional tips

• Negotiate the repayment window: a 6–12 month bridge with extensions tied to explicit milestones reduces rollover risk.
• For LOCs, request a covenant-light agreement and confirm lender rights around reductions.
• Maintain three months of cash reserves even with an LOC — don’t rely solely on credit for emergencies.

Sources & further reading

• Consumer Financial Protection Bureau — consumerfinance.gov
• IRS — irs.gov (see guidance on mortgage interest and home-equity borrowing)
• Investopedia — bridge loan and line of credit overviews

Disclaimer

This article is educational and not individualized financial, legal, or tax advice. Your choice depends on details unique to your situation. Consult a licensed financial advisor, mortgage broker, or tax professional before borrowing.