A construction loan is a short-term loan used to pay for the cost of developing land and constructing buildings. The land and fixtures are used as collateral for the loan. Payments under the loan may be disbursed as needed, at various stages of completion, or in accordance with some other conditions being met. Once the property has been completed, the property developer pays off the construction loan with the proceeds of a longer-term financing arrangement.
Construction loans are commonly issued to builders who intend to sell off properties as soon as they have been completed.