Take-Out Loan

The term refers to a financial instrument used to restructure short-term loans into long-term loans. Common examples include mortgages that are collateralised with assets and have fixed payments that are amortising.

In the most conventional scenario, short-term loans, for example, construction loans, are issued by banks or savings and loan companies, while large lenders, such as insurance or investment companies serve as take-out lenders, who underwrite these loans. 

They commonly replace short-term or interim financing, such as replacing a construction loan with a fixed-term mortgage. Take-out loans that are used to finance income generating projects, such as rent-generating real estate, may be entitled to a portion of the rents earned.

Example of a Take-Out Loan

Construction company A obtains a permit to construct a skyscraper over a period of 12 to 18 months. In order to build this costly project, Company A acquires a high interest, short-term loan to cover the costs of construction. The repayment is due in 18 months. 

Due to favourable conditions, work is completed earlier than expected, in just 12 months. To avoid the costly monthly interest, company A decides to take a take-out loan, which provides it with the principal to pay off the previous loan six months early.

The new loan allows company A to repay the loan over a period of 10 years, for a significantly smaller interest rate. It uses the money from the new take-out loan to cover the remainder of the short-term loan.