Mortgage Guru

Loan vs Mortgage: All that you should know

Loans and mortgages

Loans and mortgages are two terms that are most frequently used in the banking industry interchangeably. But, do you know that both and loan and mortgage have a significant difference in them?

It might seem to be one of the same things for a layman, and almost everyone finds the two similar because both involve lending deals. But, how the two are different and what makes them different from each other, we will know here.

Loans vs. mortgages

A mortgage and personal loan are two prominent financial products. However, if you’re just getting started in the world of lending, you may not be aware of the significant differences between the two types of loans. Both loans are regarded to be loans, although they have unique aims in mind.

Let’s explore further into the distinctions between a mortgage and a personal loan so you can pick the most effective solution for your individual needs. But, first, we will try and know what are loans and mortgages separately:

Loans: A loan is a money or financing offered to a borrower from a financial institution (generally a bank). This puts the borrower in debt, and they are liable to pay interest on the amount of the debt until they repay it in full. There are different kinds of loans, like business loans, student loans, personal loans, etc.

Mortgages: Mortgages are loans given by financial institutions (mainly banks) to finance purchasing a home or a property. When you take a mortgage, you promise to repay the money you have taken, with additionally an agreed-upon interest rate, and the home or the property is used as collateral or a guarantee.

What’s the difference between the two?

Difference #1:

  • Loan: A lender (any financial institution) gives a sum of money to the borrower for any purpose. It is like a relationship between the lender and the borrower. The funds allocated from the lender to the borrower are a ‘loan,’ and the borrower can use the funds (money) for any use, say for business, marriage, medical need, or anything else.
  • Mortgage: In a mortgage, you get financial aid from a bank or any other financial institution only for the sole purpose of buying a property or a house. If you fail to pay back the mortgage loan, the financer can foreclose the property and take it back from you. So in a way, a mortgage allows you to live in or use a property of your choice. With a mortgage, you also have specific options like payoff mortgage 5 – 7 years HELOC.

Difference #2:

  • Loan: In the case of a loan, the collateral depends on the type, amount, and lender. There are even no-collateral loans, and your history and credit score determines your loan, but loans backed by collateral are called ‘secured loans.’ This is one reason non-collateral loans have very high rates of interest. Even the formalities are fewer and need lesser documentations. Loans also have a lesser payback period.

Mortgage: The collateral in the case of mortgage is the house or the property itself. The rates of interest are typically lower with mortgages and are fully secured types of loans. Typically, the mortgage amount is huge and has more extended repayment periods, usually 20 to 30 years. You can even replace your mortgage with a new finance option that you cannot with a loan.


Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top