The art financing market
began in the 1970s. However, now the market is becoming increasingly sophisticated as financial institutions have created their own art financing divisions. Whether to turn to such funds to finance the purchase of new art needs to be carefully considered before getting a loan.
Advantages of Borrowing Funds to Purchase Art
The clearest advantage to a borrower is that a loan might give one access to a class of art works one could never otherwise afford. With the best works starting in the low six figures, but many getting into the millions of dollars, very few collectors can afford the full purchase price. Art loans, unlike other types of personal loans, can often be structured to have a repayment period that stretches years. In some cases, arts loans extend as far out as 20 years.
While carrying such a long term loan may seem daunting, it can actually help focus one on the investment value of the piece. Historically, quality pieces of art work will see their value increase over the long term, even as the short term art market can experience fluctuating market valuations. The result is a market that encourages one to think long term about an art investment, making the prospect of borrowing long term more feasible.
Challenges of Borrowing Funds to Purchase Art
The greatest challenge of borrowing money to purchase art is that most art finance groups have high asset requirements to qualify potential borrowers. Often, they’ll require the loan to be collateralized by the borrower’s current art collection. Some groups may also only make art loans for pieces worth millions of dollars. The pool of people who can meet the applicant requirements for many art loan programs is quite small.
If one doesn’t qualify for an art loan through an art asset lending group, the gallery selling the work might offer a financing program. The great disadvantage here, as opposed to borrowing from an art finance group, is that the gallery holds on to the piece until it’s paid in full. For anyone interested in the art primarily for its aesthetic value, this might be an unacceptable delay. However, if the loan repayment period is short enough, the borrower might find gallery financing a good option.
Regardless of what financing option one chooses, one also has to calculate the other costs associated with owning art. These include insurance, security, and maintenance costs. Thus, the monthly cost for the art will be higher than just the loan repayment.
Disadvantages of Borrowing Funds to Buy Art as an Investment
Art as an investment has long term potential, but can tie up assets in the short term. Therefore, anyone considering borrowing money to buy art as an investment should understand that any returns, which can’t be guaranteed, won’t be realized for some time. The question to address in such cases is whether one can afford to have a capital commitment that won’t provide any short term rewards.
The first downside is that the borrower has a monthly payment, but no potential for dividends. Unlike other investments, art doesn’t return any interim value. The second challenge is that the art market is highly subjective, which can make one’s art investment illiquid. If one is unable to make the loan payments and can’t sell the piece in the current art market, the entire investment can easily be lost.
About the Author:
This article was composed by Ty Whitworth, a person who understands the value of credit repair locations; Ty also recommends that you check out check out Craig Lynd’s profile.
