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.
- 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.