California Real Estate Practice Exam

Which type of lender prefers short-term and interim loans, where buyer costs are typically higher?

1. Commercial bank

2. Insurance company

3. Private individual

4. Savings bank

The correct answer is: Commercial bank

A commercial bank is typically the lender that prefers short-term and interim loans, which are often used for purposes such as construction financing or bridging gaps between property transactions. These types of loans are characterized by higher costs for buyers due to their short duration and the increased risk associated with them. Commercial banks participate in underwriting these loans to ensure they have a way to earn returns in a timely manner, as they generally prefer to have their funds generated and reinvested more quickly compared to long-term loans. This preference for shorter loan durations aligns with the bank's operational goals of liquidity management and capital efficiency. In contrast, other types of lenders, such as insurance companies or savings banks, usually focus on longer-term financing arrangements that provide stability and predictability in their income streams. Additionally, private individuals may also engage in lending but do so in less regulated and varied terms, making them less consistent as a primary source for short-term loans compared to commercial banks.