When it comes to financial needs, the right loan type can make a big difference in your financial health. Two common loan options are personal loans and mortgage loans. Both serve different purposes, come with varying interest rates, repayment terms, and requirements, and are designed to cater to distinct financial goals. But how do you choose which of them is best suited for your needs? The first step toward this is understanding difference between personal loan and mortgage.
We will discuss mortgage loan vs personal loan, how to compare the two, and when you should consider using one over the other. In this guide, whether it’s to finance your dream home or cover emergency expenses, we have what you need to make that right choice.
What is a Mortgage Loan?
A mortgage is a type of secured loan issued solely for purchasing real estate, such as a house or commercial property. The property you have bought is pledged for the mortgage, thus granting the owner the right to take possession if you are not capable of repaying it.
A mortgage loan is for many years. Most repayment durations take 15 years through 30 years. Key features of mortgage loans are;
- Specific Uses: A mortgage loan is supposed to be used particularly for buying real estate.
- Collateral-based: The property becomes the collateral for the mortgage.
- Longer Repayment Periods: The repayment periods are usually 20-30 years, which offers lower monthly instalments.
- Lower interest rates: Since mortgage loans are secured, they usually have a lower interest rate than unsecured loans.
One key difference in interest rates between home loans and personal loans is that the former are relatively lower. This is because collateral is attached to the loan, reducing the lender’s risk. This makes them the go-to financial planner for long-term financial planning, especially if real estate is involved.
What is a Personal Loan?
A personal loan is any general-purpose loan obtained by a person for various purposes, including medical emergencies, debt repayment, home improvement, or travel sponsorship. Personal loans are only sometimes secured, so they do not usually require collateral.
Major characteristics of personal loans:
- Flexibility: Amount borrowed may be spent almost anywhere
- Shorter Tenures: Short-term periods of repayments of 1-5 years.
- Higher Interest Rates: Higher interest rates apply because personal loans are unsecured, unlike secured loans.
- Quick Disbursal: Easy and faster disbursal is one of the features of a personal loan, where less documentation is necessary to acquire a personal loan.
Now, let’s discuss personal loans vs. mortgage loans in India. Evidently, personal loans offer flexibility, but they are better for short-term money requirements, as their interest rates are higher, and the repayment period is shorter.
Key Differences Between Mortgage and Personal Loans
Understanding what makes a mortgage loan vs personal loan different from each other can help you decide which one fits best with your financial needs. Here are the primary differences between personal loan and mortgage:
- Purpose of the loan
A mortgage loan can be availed only to purchase real estate. However, using personal loans requires many things, like medical bills, education, and vacations.
- Collateral requirement
Collateral, such as property, is required to get a mortgage loan, but a personal loan does not require any form of collateral.
- Repayment tenure
The mortgage loans are paid over a long period of 30 years. Personal loans, however, have to be paid back within a short period, usually 1 to 5 years.
- Interest Rates
The comparison between home loan and personal loan interest rates reveals that mortgage loans have lower rates because they are secured. Personal loans often carry higher rates due to the lack of collateral.
- Approval Process
Mortgage loans are lengthy procedures that involve a lot of documentation and property appraisal. Personal loans are easier to get and are disbursed faster.
These differences between personal loan and mortgage explain why one should consider one’s financial needs and repayment ability when choosing a personal loan or mortgage.
When Should You Choose a Mortgage Loan?
A mortgage loan is the best option when:
- You Want to Buy Real Estate: Be it any form of property, whether that would be a house or commercial, mortgage loans are specially set for buying real estate.
- You Can Provide Collateral: Because the said house acts as a piece of collateral, you are all right with this and happy with it.
- You Need Long-term Financing: A mortgage is the best option for you if you need a large sum, preferably repayable over several decades.
- You Want a Lower Rate of Interest: Compared to other borrowings, a mortgage has a relatively lower rate of interest, which makes long-term commitments seem costlier.
Understanding why a mortgage is preferred over a personal loan in such scenarios makes making such a decision simple enough.
When Should You Choose a Personal Loan?
A personal loan, however, could be a good option if:
- You Need Urgent Cash: Personal loans are usually disbursed within a very short time, which is ideal for emergencies like hospital bills or urgent repairs.
- You Lack Collateral: If you don’t have any assets to give as collateral, you will have to take out a personal loan.
- You Need It for the Short Term: Personal loans are also suitable for smaller short-term expenses, such as debt consolidation and wedding financing.
- You Want Flexibility: Personal loans can be taken for almost anything, giving you greater freedom to use your funds as needed.
If you look at personal loans vs mortgage loans in India, the former certainly gains on ease and flexibility of usage for short-term or immediate needs.
Comparing Loan Repayment Flexibility
The tenure and EMIs being relatively longer and lower, respectively, with a mortgage loan differ in terms from a personal loan regarding the facility of repaying the loan:
- Mortgage Loans: The long tenures and low EMIs have more flexibility, but there’s always a chance of penalty if prepaid.
- Personal Loans: Generally, shorter tenure loans allow one to pay off easily without severe penalties.
The personal loan vs mortgage depends on how strong one is in handling monthly EMIs and the financial planning horizon.
Risks and Challenges of Both Loan Types
The following are the risks and challenges associated with mortgage loan vs personal loan
Mortgage Loans:
- If EMIs are not paid in time, there is always the risk of foreclosure.
- Long-term commitment is costly to commit to financially.
- High upfront costs such as down payment, appraisal, and insurance
Personal Loans
- Higher interest rates would increase the cost of borrowing.
- Loan amounts are too small for such big-ticket purchases like real estate
- A short repayment period could be very stressful to your monthly budget
Knowing all these risks puts you in a better position to determine the value of a personal loan versus a mortgage
Bottom Line
Consider difference between personal loan and mortgage loan when making a financial choice and trying to decide on a suitable funding alternative. If you are purchasing real estate and have time to make repayments, you may opt for a mortgage. On the other hand, if your needs are pressing and you require flexibility in use, you might opt for a personal loan.
Here at Stashfin, we are aware that each borrower has unique needs. Whether you are seeking personal loans or something else from alternative financial avenues, our tailor-made solutions, competitive home loan vs personal loan interest rates, and easy application process will cater to your demands.