Required for different reasons and varying amounts, a loan is an efficient way to deal with the shortage of funds that comes with the flexibility to repay the borrowed amount through easy EMIs. However, it is essential to know the key differences between different kinds of loans to obtain the best offer.
While a mortgage loan is specifically designed for borrowing a substantial amount of money easily repayable over a flexible tenure of up to 15 years, there are certain risks associated with it. Some of them could be transferring control of the asset to the lender until the loan is completely repaid, the principal amount, and the accrued mortgage loan interest. Hence, one should have a sound understanding of multiple types of loans as each one serves a different purpose.
Scroll down to know more about the critical differences between a loan and a mortgage.
- Definition
A loan is a lump sum of money borrowed from a financial institution to deal with various expected and unexpected expenses. A loan can be primarily classified into two categories:
-> A secured loan backed by collateral (home loan, business loan).
-> Unsecured loan offered without any collateral (personal loan, MSME loan).
A mortgage is a type of secured loan where the borrower pledges his immovable property as collateral against the loan money to the lender. In such loans, the borrowers can regain their complete ownership of their asset only upon completely closing the loan.
- Uses
In the case of secured loans such as a business loan or home loan, the lender imposes certain limits to use the allocated funds for the specific purpose the borrower requested.
Conversely, mortgage loans are issued without any end-use obligation. They can be used for several purposes, such as paying medical bills for a health emergency, funding higher education, arranging a grand wedding, or starting a business.
- Loan tenure
Most loans, such as a personal loan or a business loan, are offered with a flexible repayment period ranging between 12 months to 60 months. In the case of a mortgage loan, the tenure is relatively long compared to other loans. It ranges from 1 to 15 years, depending upon the borrower’s loan amount, rate of interest, and repayment capacity.
- Interest Rate
For most loans, especially unsecured loans, the charged interest rate is relatively high based on the candidate’s age, monthly income, credit rating, and nature of employment.
On the other hand, the levied interest rate for mortgage loans is comparatively low as the loan amount remains entirely protected by the candidate’s residential or commercial property. Usually charged between 9% and 24%, the interest rate is relatively low compared to the other loans due to its secured nature.
- Loan amount
For unsecured loans, the sanctioned loan amount could vary from lender to lender as it depends upon the requirements and eligibility of the borrower. Thus, one needs to compare the deals offered by different financial institutions before finalizing the lender.
In the case of mortgage loans, the borrower should evaluate the property value before submitting the loan against the property application. Upon a thorough assessment of the value of a property based on its age, location, amenities offered, size, and several other factors, the borrower is better positioned to negotiate with the lender to get the desired amount of money.
- Default Payment Scenario
In the case of unsecured loans such as personal or MSME loans, if the borrower fails to repay the equated monthly installments of time, the lender does not hold any claim over any of the borrower’s assets. However, in the case of a home loan or business loan, the financial institution has the right to take the borrower to court and liquidate their asset to get their money back.
While the funds are obtained in a mortgage loan by pledging your residential or commercial property as collateral, the lender may be able to seize partial or complete control of the asset if the borrower defaults on submitting the monthly installments in time.
- Documentation
In the case of a personal loan or MSME loan, there is a lot less paperwork than a mortgage loan due to no collateral involvement.
On the other hand, a mortgage loan involves many formalities and documentation related to the property, such as title deeds, property insurance, registration papers, and approval from relevant authorities, building plans, etc.