Difference Between Loan and Mortgage

Edited by Diffzy | Updated on: July 16, 2022

       

Difference Between Loan and Mortgage Difference Between Loan and Mortgage

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Introduction

Both mortgages and loans are related to finance. A loan, in financial terms, is the lending of money by one or more persons, institutions, or other entities to other people, institutions, or entities. The receiver incurs a debt and is often required to pay interests on that loan until it is completed, in addition to repaying the primary principal sum. A mortgage, however, is a part of the loan which is used by the borrower to purchase or maintain an area of land or a real estate. The borrowers, in such financial transactions, promise to pay back the loan over time, often in the form of a series of monthly instalments subdivided into principal and interest. Both are thus used for the transaction of money to fulfil one’s particular necessity and also give back the sum along with an instalment over a particular period.

Loan vs. Mortgage

The key difference between a loan and a mortgage is that the loan is an amount or rather the total sum of money which is taken or borrowed from any financial organization to fulfil various necessities or requirements. It may either be secured or unsecured. However, on the other hand, mortgage refers to any immovable property such as a real stand, a land area, a home, etc which is used as a guarantee or security to avail of a loan. Here, the borrower or the one who purchases the loan can gain complete ownership of the immovable property once they can return the full amount along with the interest to the lender.

Difference Between Loan and Mortgage in Tabular Form

Table: Loan vs. Mortgage
Parameters of Comparison
Loan
Mortgage
Definition
A loan is a sort of credit instrument in which an amount of cash is provided to some other entity or party (community) in consideration for future payback of the value of the loan or original sum.
A mortgage is a transfer of an interest in actual properties (real estate, homes etc.) as assurance for reimbursement of borrowed capital to purchase the property. It is a claim or hold on the possessions that allow the creditor to seize ownership if the payment or loan is not given back.
Privacy
Loans can be secured or unsecured.
Mortgages are always secured since they are supported or backed by collateral.
Duration
The duration of time for loans is comparatively less than for mortgage loans.
The duration of time for a mortgage is generally more than that of loans.
Monthly Payment Inclusions
Typically loans only include the principal and interest payments.
Mortgages also include the principal as well as the interest payments. But here, the borrower can also include the property taxes as well as the owner’s insurance.
Types
Open-ended loans, close-ended loans, unsecured loans, secured loans, mortgage loans, payday loans, students loans, home loans, business loans etc.
Adjustable-rate mortgages, reverse mortgages, fixed-rate mortgages, VA loan mortgages, FHA mortgage loans etc.
Documentations
 
There are fewer documents related to secured and unsecured loans.
In the case of mortgages, documents are very intensive and also involve a huge amount of paper-works and formalities.
Payback Policies
If a person cannot pay back the loan amount on the stipulated time, the individual can undergo some serious consequences from the financial sector or rather from the bank such as rigorous follow up as well as penalties can be imposed against the borrower.
With a mortgage, if the borrower is not able to pay back the loan within the stipulated time, the lender or the financial organization shall have the power to take the ownership or take control over the property (real estate, land area, housing etc.) that was pledged.

What is Loan?

A loan is an amount of money or property or other material goods which are provided or given to other organizations or institutions in exchange for future repayment of the loan value along with the principal and the interest amount. The interest rate and the time frame for repaying the loan are predetermined. EMI is the most common method of re-payment of loans. A loan can be for a definite, one-time sum or an open-ended line of credit up to a certain maximum value.

Individual people, enterprises, international banks as well as government agencies can all give out loans. They provide a means of increasing an economy's overall value of the currency, as well as opening up competitive pressures and expanding corporate activities. Loan interest and fees are also a significant source of funding for many financial institutions, including banks, as well as certain companies that have proper and secured access to credit facilities.

Since loans are non-taxable, therefore the customer need not pay any kind of tax for the amount which is received as a loan. The EMI which is already being paid towards the repayment of the loan can necessarily help in availing tax benefits. There are numerous types of loans available depending on the economic needs at hand. Banks can give loans to people that are either protected or unprotected in nature. Many customers like secured or protected loans because they have lower rates of interest and a fairly significant quantity of money offered to them, which they may use to buy a house or a car. On the other hand, unprotected or unsecured loans are most commonly seen in the form of individual or personal loans, which comparatively has a higher rate of interest and are also provided for a minimal sum of money for reasons like residence renovations and others such.

The loan works in a manner as such the terms and conditions are accepted by each party before moving to any kind of transaction. If the lender requires collateral, this requirement shall be mentioned in the document of the loan beforehand. Most of the loans also have the provision for the maximum rate of interest along with other covenants such as the extension of time before repaying the amount and so on. Though the requirement of the document is very minimal in the case of loans, in some cases (like to trace any individual who has escaped from repaying the loan amount and the interest) valid proof or documents are of critical importance.

Types of Loans

There are various types of loans. They are as follows:

Secured or Protected Loans

These loans demand the client to install securities in exchange for the funds. If the client becomes unable to pay the loan back, the bank maintains the right to access the late payments using the promised securities.

Unsecured or Unprotected Loans

Unsecured loans are ones in which no documentation is required for loan delivery. To assess whether or not to provide the loans, the bank considers the lender's previous connection, payment history, as well as other variables.  Because there is no means to recuperate the amount of the loan if the borrower fails, the rate of interest on such loans is a bit higher compared to those of secured ones.

Housing Loan or Home Loan

Home loans are dedicated to receiving funds to purchase a house or a flat, construct a house, renovate or repair an existing house, or purchase a plot for the construction of a house or a flat.

Personal Loan

Personal loans are generally unprotected in nature, which means that no collateral is required. They may have fixed or variable interest rates, as well as payback lengths ranging from a few months to several years. Personal loans are granted based on the borrower's previous connection with the lender as well as their payment history.

Apart from these, there are also other types of loans. They are:

  • Car loan
  • Student loan
  • Payday loan
  • Gold loan
  • Loan against assets etc.

What is a Mortgage?

A mortgage is a type of loan in which the client draws money out of the bank by surrendering a property worth more than the borrowed amount. Mortgages are a type of secured or protected loan.  A mortgage loan can also be used to purchase, construct, or restructure a home. Renovation is the method of obtaining a new loan for an asset while the prior loan is still being paid off. It is frequently done to obtain a loan with improved conditions.

Since mortgages are secured loans, therefore they have less amount of interest that is required to pay during repayment of the amount borrowed. The period of clearing the payment is also more than the simple loans due to the heavy involvement of capital or amount. A mortgage requires quite more amount of documents and formalities when compared to business loans.

In cases where the borrower is late or unable to pay off the necessary amount back to the organization or the institution, the lender can have the right to take complete ownership of the borrower’s property.

Types of Mortgage

There are various types of mortgage loans. Some of them are described below:

Simple Mortgage

It is a kind of loan that states that if the borrower is unable to repay the loan in full, the lender may sell the property used as collateral to recoup their investment. The property, however, is not transferred to the lender.

ARM (Adjustable Rate Mortgage)

The rate of interest for ARM is fixed in nature which is applicable for a limited amount of time. It also gets influenced based on the market rate. The initial interest rate is frequently lower than the market rate, which might make the mortgage cheaper in the near term but potentially less affordable in the long run if the rate rises significantly. ARMs generally feature limitations on how much the rate of interest can grow or develop every time it needs to adjust throughout the life of the loan.

Fixed-Rate Mortgage

This type of mortgage loan maintains the same amount or the rate of interest throughout the entire period of the life of the loan. This means that the monthly period of payment of the mortgage always remains the same. Fixed loans typically come in terms of 15 years or 30 years, although some lenders allow borrowers to pick any term between eight and 30 years.

There are other types of mortgage as well besides these. They are:

  • Ownership exchanged mortgage
  • Conditional mortgage
  • Mortgage by title deed deposit
  • Lender’s liability mortgage
  • Reverse mortgage
  • FHA mortgage etc.

Main Differences Between Loans and Mortgages in Points

  • The primary distinction between a loan and a mortgage is the way of obtaining a loan. Generally, a loan or line of credit is an amount obtained by a consumer from a bank, financial organisation or individual with no security or assets attached. Mortgages, on the other hand, are a sort of loan or lending credit in which the client obtains funds by surrendering a business worth much more than the amount borrowed.
  • Loans do not require any formalities or documents and hence they are considered unsecured or unprotected. Mortgages, however, require a lot of documents as well as formalities which makes it a protected or secured type of loan.
  • Compared to mortgages the rate of interest for loans is much higher.
  • The payback period for loans is also shorter as opposed to mortgage loans, which are always longer.
  • If a person cannot pay back the loan amount on the stipulated time, the individual can undergo some serious consequences from the financial sector or rather from the bank such as rigorous follow up as well as penalties can be imposed against the borrower. On the other hand, with a mortgage, if the borrower is not able to pay back the loan within the stipulated time, the lender or the financial organization shall have the power to take the ownership or take control over the property (real estate, land area, housing etc.) that was pledged.

Conclusion

Lending is what drives the finance industry, and it is via providing loans that banks or any other financial institution assist the economic progress and the administration in the production of commodities and raising the money supply in the market, which in turn enhances the purchasing power of consumers. Loans drive the economy of the country. The purchasing power of the customers shall improve through loans.

Mortgages on the other hand help in renovating loans as well as the assets of human beings. When a purchaser and the lender reach an accord on their transaction, they or their agents will gather at a settlement. The borrower pays a down payment to the lender at this time and the seller will give the buyer control of the asset and the agreement supply of loanable funds, and the buyer will sign any necessary financing agreements.

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"Difference Between Loan and Mortgage." Diffzy.com, 2022. Tue. 06 Dec. 2022. <https://www.diffzy.com/article/difference-between-loan-and-mortgage-133>.



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