A bridge loan quoted at “2% plus 9% interest” sounds comparable to a mortgage. It is not, and the reason is that one of those numbers has a time period attached to it and the other does not.
The thing a flat fee leaves out
An interest rate is a rate per year. A fee is a one-off percentage of the amount borrowed, and the quote almost never says over what period.
That omission matters most when the period is short.
Borrow $200,000 and pay a 2% origination fee:
200,000 x 0.02 = $4,000
That $4,000 is the same whether you hold the money for twelve months or for three. What changes is what you got for it.
| Held for | Fee | As an annual rate |
|---|---|---|
| 12 months | $4,000 | 2% |
| 6 months | $4,000 | 4% |
| 3 months | $4,000 | 8% |
| 1 month | $4,000 | 24% |
Nothing about the loan changed between those rows. Only the length of time the fee bought.
Putting the whole cost together
A bridge loan usually carries both a fee and an interest rate, so the real annual cost is the two combined.
Take $200,000 for 6 months, at 9% interest with a 2% fee:
Interest 200,000 x 0.09 x (6 / 12) = $9,000
Fee 200,000 x 0.02 = $4,000
-------
Total cost over six months = $13,000
As a proportion of the amount borrowed:
13,000 / 200,000 = 6.5% over six months
Annualised:
6.5% x (12 / 6) = 13% a year
So a loan advertised at 9% costs about 13% a year once the fee is counted. Halve the term to three months and the interest halves but the fee does not, so the annualised cost rises to roughly 17%.
That is the shape worth remembering: shortening a fee-bearing loan makes it more expensive per year, not less.
Why the comparison matters
A mortgage rate, a credit card APR and a bridge loan fee are quoted in three different ways, and only one of them is already annual. Putting them on the same basis is the only way to answer “is this expensive” at all.
Our bridge loan calculator reports the annualised cost alongside the headline rate for exactly this reason. The headline is what you are quoted. The annualised figure is what it is.
What this does not settle
Whether the cost is worth paying.
A bridge loan exists to solve a timing problem: completing a purchase before a sale has closed. A high annualised rate on a short loan can be entirely reasonable when the alternative is losing the purchase, and comparing it to a thirty-year mortgage rate is comparing two different products doing two different jobs.
What this page gives you is the real number. What it is worth is a question about your situation, and this site does not answer those.
The same trap elsewhere
The pattern repeats anywhere money is lent briefly for a flat fee. A “1.2 factor rate” on a merchant advance, a 3% invoice factoring fee, a four-payment instalment plan with a fixed charge: in each case the quoted number is a proportion of the principal with no time attached.
Dividing the fee by the fraction of a year it covers is the whole technique. The Consumer Financial Protection Bureau’s glossary of mortgage terms defines the lending vocabulary, and the disclosure rules that decide what a lender must call an APR sit in Regulation Z, 12 CFR 1026.
Questions
- Why does a 2% fee annualise to so much more than 2%?
- Because you pay it once for a short period but an annual rate describes a full year. A 2% fee on money borrowed for six months costs the same as roughly 4% a year. Borrow for three months and the same fee is worth about 8% a year. The fee did not change; the time it bought did.
- Is the annualised figure the APR?
- It is the same idea and it is not always the same number. A lender's stated APR follows a defined calculation that includes some charges and excludes others. The point of annualising by hand is comparability, not replicating a regulatory figure.
- Does this apply to anything other than bridge loans?
- Any short-dated borrowing quoted as a flat fee. Merchant cash advances, invoice factoring, some buy-now-pay-later arrangements and short business loans all have the same shape. The shorter the term, the larger the gap between the quoted fee and the annual cost.
- So is a bridge loan a bad deal?
- This site does not rank it. A bridge loan buys the ability to complete a purchase before a sale, which may be worth a high annualised cost for a few months. The point is to know what the cost actually is before deciding that, rather than comparing a flat fee against a mortgage rate as though they were the same kind of number.