What is the term for a short-term loan made during the construction phase of a building project?

The term for a short-term loan made during the construction phase of a building project is known as a construction loan. This type of financing is specifically designed to cover the costs of building a new structure or making significant renovations to an existing one. Typically, construction loans are disbursed in stages as the work progresses, allowing the borrower to pay contractors and suppliers as needed.

Unlike conventional loans, which are often used for purchasing existing properties, construction loans provide funding tailored for projects that are not yet complete. They usually have slightly higher interest rates to account for the increased risk associated with construction projects, where completion timelines can be unpredictable. Once construction is complete, the borrower may need to secure a permanent loan to pay off the construction loan, which leads to the concept of a conversion loan. However, the primary characteristic that defines a construction loan is its use during the building phase, emphasizing its short-term nature.

Consumer loans, on the other hand, are generally borrowed for personal expenses and do not pertain specifically to real estate construction.