Difference Between Loan and Mortgage: What You Actually Need to Know
Loan in
60 Minutes
Planning to buy a house? Or maybe you need funds for a medical emergency, wedding, travel, etc.
Here's where things get confusing for most people. Loan. Mortgage. Same thing? Not quite.
Both involve borrowing money. Both require repayment with interest. But the similarities pretty much end there. Understanding the difference between loan and mortgage can help you choose the right financial option and save lakhs over time.
What is a Loan?
A loan is an agreement with a bank, NBFC, or financial institution that allows you to borrow money for a limited period. You receive a lump sum amount upfront, which you then repay to the lender, with interest, in regular instalments (EMIs) over a predetermined period.
The key characteristics of a loan are as follows:
- Fixed or variable interest rates
- Predetermined repayment schedule
- Can be secured (backed by a collateral) or unsecured
- Approval based on creditworthiness, income, and/or collateral
Common Types of Loans
Not all loans work the same way. Here's what's out there:
- Personal Loans - No end-usage restrictions (except for speculative activities). The interest rate for a personal loan is typically higher than other loans because there's no security involved.
- Vehicle Loans - Specifically for buying cars or two-wheelers. The vehicle itself acts as a collateral.
- Education Loans - For funding higher studies. Often comes with a moratorium period where you don't pay EMIs while studying.
- Business Loans - Working capital, equipment purchase, expansion. Can be secured or unsecured depending on the amount.
- Gold Loans - You pledge gold jewellery and get funds. Quick disbursement, relatively lower interest rates.
How Loans Work
The process isn't complicated once you understand the flow:
- You apply for the loan via online or offline mode
- Lender checks your credit score, income, existing debts
- If approved, the loan amount is disbursed
- You repay the loan through EMIs over the agreed tenure
- Your loan account will close once the loan amount is fully repaid
For unsecured loans, approval depends heavily on your credit history. Secured loans have more flexibility since there's collateral backing the risk.
What is a Mortgage?
A mortgage is technically a type of loan tied exclusively to a real estate property.
When you take a mortgage, you are essentially borrowing money to purchase a property. That property becomes the collateral. However, if you are unable to repay the loan, the lender has the legal right to seize and sell that property.
The interest rates for a mortgage are typically lower than other loan types as it is backed by a collateral which reduces the lender’s risk significantly.
The main features of a mortgage are as follows:
- Always secured against property
- Longer tenures (usually between 10 to 30 years)
- Lower interest rates compared to a Personal Loan
- Involves legal documentation and property verification
- Requires down payment (usually 10% to 20% of the property value)
Types of Mortgages
The main types of mortgages in India are as follows:
Home Loan - It is a loan offered by lenders to help you purchase a residential property.
Loan Against Property (LAP) - You already own property and mortgage it to get funds for other purposes.
Home Construction Loan - For building a house on land you own. Disbursement happens in stages as construction progresses.
Home Renovation Loan - Smaller amounts for repairs and upgrades to existing property.
How Mortgages Work
The mortgage process runs deeper than a regular loan:
- Identify the property you want to purchase
- Apply for a mortgage with the required documents
- Lender verifies your income and credit profile along with conducting property valuation and legal checks.
- The lender sanctions your loan based on the property value, your down payment and the repayment capacity
- Lender disburses the loan amount which you can repay through EMIs over 10 - 30 years
- Property remains mortgaged until full repayment
You can check your credit scores with Finnable and get regular updates on how to improve your score. Having a credit score above 700 improves your chances of availing of loans or mortgages at better interest rates.
Key Differences Between a Loan and a Mortgage
Here's where the loan vs mortgage distinction becomes crystal clear.
Purpose and Usage
Loans: While a Personal Loan has no end-usage restrictions, other loans like Vehicle Loans or Gold Loans are for specific purposes only.
Mortgages: You can take a mortgage only for buying or leveraging a property.
Loan Duration
Loans: Personal loans typically run 1 - 5 years while vehicle loans can go up to 7 years.
Mortgages: The repayment tenure for mortgages are usually between 15 to 30 years.
Interest Rate and Repayment Structure
Loans: The interest rates for unsecured loans are usually between 11-24% p.a. However, you can get slightly better rates if you opt for secured loans.
Mortgages: Lower rates (8 - 12% p.a. typically). The property collateral makes lenders comfortable offering competitive rates.
Collateral and Security
Loans: Can be secured or unsecured.
Mortgages: Secured against your property
Application and Approval Process
Loans: Relatively faster than mortgages with minimal documentation. Personal loans from NBFCs like Finnable can get disbursed within 60 minutes.
Mortgages: Time-consuming with heavy paperwork. Property verification, legal checks and valuation of the property can take several weeks.
When to Choose Between a Loan vs a Mortgage
You can opt for any of these two financial products based on factors like purpose, loan amount, repayment burden, etc.
Choose a loan when:
- You want flexibility in end-usage of funds
- The amount is relatively smaller (under ₹10 to ₹15 Lakh)
- You want a shorter repayment tenure
- Speed matters - you need money quickly
Choose a mortgage when:
- You're buying residential or commercial property
- You already own property and need large funds
- You want lower interest rates and longer tenure
- You can wait through the approval process
Impact on Credit and Financial Planning
Both loans and mortgages affect your financial health. Understanding this helps you plan better.
Every loan application triggers a hard inquiry on your credit report. Too many hard inquiries in a short period can negatively impact your credit score.
Mortgages have a sustained impact on your credit profile. Consistent payments over years build strong credit history.
Budgeting for Loan vs Mortgage Payments
Your total EMI commitments shouldn't exceed 40-50% of your monthly income.
A mortgage usually has hidden costs like property registration charges, stamp duty, home insurance or maintenance costs, which can inflate your monthly repayments. However, the budgeting is simpler for personal loans as it usually involves processing fees and prepayment charges.
You can use an EMI calculator before deciding whether to choose between a loan vs mortgage. It helps you understand the estimated monthly payments for each option. Finnable's processing fees go up to 4%, with interest rates ranging from 15% to 30.99% p.a. based on your credit profile.
Making Your Decision
The difference between loan and mortgage comes down to purpose, amount, and what you're willing to put at stake.
Need quick funds for personal expenses? A personal loan is a more suitable option as it has a faster approval process, flexible usage and zero collateral requirements.
Buying property? A mortgage (home loan) is a better alternative with lower interest rates and longer repayment tenure.
Ready to explore your options? Check your eligibility and see what loan amount you qualify for - takes just a few minutes.
Yes, absolutely. A mortgage is a specialised loan secured against real estate. All mortgages are loans, but not all loans are mortgages.
No. A mortgage inherently involves borrowing money, which is a loan, against collateral.
Personal loans are typically unsecured in nature, have shorter repayment tenures, higher interest rates, and flexibility in terms of end-usage. Mortgages, on the other hand, are always secured against property, have higher tenures and offer lower rates.
You can avail of a loan with relative ease when compared to a mortgage as it is usually unsecured in nature, has minimal documentation and a faster approval process.
If you default on an unsecured loan, you may end up facing legal action and undergo recovery proceedings. On the other hand, defaulting on a mortgage can result in the lender taking legal taking possession of your property and selling it to recover the loan.
Loan in
60 Minutes
What is a Loan?
What is a Mortgage?
Key Differences Between a Loan and a Mortgage
When to Choose Between a Loan vs a Mortgage
Impact on Credit and Financial Planning
Making Your Decision
