What Is a Permanent Loan?
A permanent loan is a type of loan with an unusually long term. The term can have different meanings, however, depending on the context in which it is used.
Despite its name, permanent loans are generally not permanent, although they may last for a long time.
Key Takeaways
- A permanent loan is a type of loan with an unusually long term. The term can have different meanings, however, depending on the context.
- Permanent loans have different meanings depending on their context.
- The term is commonly used in the fine art and real estate markets.
- With the exception of certain government bonds, permanent loans are not in fact permanent.
Understanding Permanent Loans
The term "permanent loan" can be confusing because its meaning can differ greatly depending on the context. For example, in the fine art market, permanent loans are arrangements in which the donor of an artwork agrees to lend it to an art gallery or museum for an extended period of time.
Permanent loans in this context are alternatives to an outright gift or donation. Yet although the term "loan" typically implies a financial motive, permanent loans in the art world generally do not involve any interest payments or other financial compensation. Instead, the donor will simply expect certain parameters to be followed by the receiving institution, such as agreeing on the duration of the loan and arranging that the donor will receive public recognition for the loaned artwork. Despite the word "permanent," these permanent loans are in fact temporary, with terms generally ranging between five to thirty years.
In the world of real estate, the term "permanent loan" is used to describe the mortgage loans secured by real estate developers after a given projected has been completed. These permanent mortgage loans generally replace the construction loan financing that the developer had relied upon in order to develop the building and prepare it for sale. Here again, although the term permanent is used, a more accurate description would be "long-term loan." The amortization periods on permanent real estate loans are typically in the 15- to 30-year range, with 25 years being a common example.
One instance in which the term permanent loan is more directly applicable is in relation to so-called perpetual bonds, or "consols." These sovereign debt instruments were historically issued by the governments of the United States and the United Kingdom, and they were unique in that they did not specify a particular maturity date. In theory, the owners of these perpetual bonds could continue earning interest on their principal indefinitely. In practice, however, these bonds were eventually redeemed by both governments.
Real World Example of a Permanent Loan
Eryn is a curator at a major art museum. One of her donors offers to provide a famous art piece from their permanent collection, made available to the museum as a permanent loan.
Under the terms of the permanent loan agreement, the museum will have possession of the art piece for a predetermined term of 20 years. In return, the museum agrees to publicly acknowledge the donation both in the description of the art piece and in the museum's marketing materials. The museum will also secure special insurance to protect both themselves and the donor against the risk that the piece might be damaged during the term of the loan.
FAQs
Usually, permanent loans are balloon mortgages with fixed payments of interest and principal that are amortized over a specified period of time. A permanent loan is often a condition precedent for a construction loan, although sometimes the construction loan may be converted (by its own terms) into a permanent loan.
What is an example of permanent financing? ›
Understanding Permanent Loans
For example, in the fine art market, permanent loans are arrangements in which the donor of an artwork agrees to lend it to an art gallery or museum for an extended period of time. Permanent loans in this context are alternatives to an outright gift or donation.
What is a permanent take-out loan? ›
A takeout loan is simply a permanent loan that pays off a construction loan. It's that simple. You build an office building with an uncovered construction loan; i.e., the lender does not require a forward takeout commitment. The building is completed.
What is a permanent financing loan Quizlet? ›
Permanent loans usually refer to financing: after construction is completed and after the occupancy of the property is said to be stabilized.
What is an example of a permanent source of finance? ›
Permanent sources of finance: Equity share capital is belonging to long-term permanent nature of sources of finance, hence, it can be used for long-term or fixed capital requirement of the business concern. 2. Voting rights: Equity shareholders are the real owners of the company who have voting rights.
What does permanent mean in banking? ›
: lasting or intended to last for a very long time : not temporary or changing. permanence. -nən(t)s.
What is a permanent form of financing? ›
Equity—common and preferred stock—is considered a permanent form of financing on which the firm may or may not pay dividends. Dividends are not tax-deductible. The main types of long-term debt are term loans, bonds, and mortgage loans.
What are examples for permanent working capital? ›
Permanent working capital includes funds required to maintain inventory, pay salaries and rent, and cover other regular expenses in the ordinary course of business. It is typically financed through long-term means such as equity or debt.
What is permanent debt in finance? ›
Permanent Debt Financing means long-term debt with a minimum maturity period of 10 years.
What is a permanent loan modification? ›
November 11, 2023 • 8 min read. By Jim Akin. Quick Answer. A loan modification is a permanent change to the terms of your original loan. The purpose of a loan modification is to make payments more affordable for borrowers in financial hardship.
Cost overruns: If the project goes over budget (and most do), the loan amount might not cover it. In this case, you'd have to pay out of pocket or get another loan to cover the additional costs. Higher interest rates: Construction-to-permanent loans are generally more costly than conventional mortgages.
Can a loan be cashed out? ›
Cash-out refinance gives you a lump sum when you close your refinance loan. The loan proceeds are first used to pay off your existing mortgage(s), including closing costs and any prepaid items (for example real estate taxes or homeowners insurance); any remaining funds are paid to you.
What is a type of long term permanent financing for residential construction? ›
Construction-to-Permanent (C-to-P) financing allows lenders to replace the interim construction financing borrowers use to construct a new residence with a long-term mortgage that can be delivered to Fannie Mae.
What type of financing is long term? ›
Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments.
What kind of loan would be fully paid out over the lifetime of the loan? ›
Fully amortized loans have schedules such that the amount of your payment that goes toward principal and interest changes over time so that your balance is fully paid off by the end of the loan term.
What is the purpose of the construction permanent loan? ›
Construction-to-permanent financing is a type of loan which allows you to build or renovate your home. When the construction process concludes, this loan rolls over into a traditional mortgage without you having to go through another closing. You'll only have to pay for one set of closing costs.
