Loans benefited two parties; the People and the Nation. Lending is a system that drives the banking industry to help a country’s economy grow to sensational heights.
The government takes this opportunity to increase the money supply in the economy. This, in turn, improves the purchasing power of the people.
It is also advised the experts in the finance domain watch out carefully while availing of a loan from financial institutions. Careful steps to be taken while repaying the debt, as non-payment can lead to severe consequences.
Banks offer attractive loans in various forms for the customers to get benefitted in a short period. Financially speaking, a loan is structured between individuals, groups or firms which give money to people with the expectation of getting it repaid.
While the repayment happens with interest, the lending entity uses this for further lending activities. It is indeed a cycle of lending and collecting.
There are many types of loans available in the finance industry. It is not only the individual who can avail of a loan but also businesses. Every loan has its norms, procedures, and interest rates.
When the word loan is used, the first thing that strikes the mind is Mortgage. Mortgage and loans are terms interchangeably used in many contexts.
Key Takeaways
- A loan is a general term for a financial agreement where a lender provides a borrower with a sum of money to be repaid with interest over a specified period. A mortgage is a specific type of loan secured by real estate property.
- Mortgages are used to finance the purchase of real estate, with the property serving as collateral for the loan. In contrast, loans can be used for various purposes, such as personal expenses, education, or business needs.
- Mortgages have lower interest rates and longer repayment terms than other types of loans due to the collateral provided by the real estate property.
Loan vs Mortgage
The difference between Loan and Mortgage is the loan-acquiring method. Loan, in general, is the money received by a customer from a bank, any financial institution, or any individual without any security or collateral involved. Conversely, a mortgage is a type of loan where the customer receives the money by pledging a property worth more than the money availed as a loan.
Comparison Table
| Parameter of Comparison | Loan | Mortgage |
|---|---|---|
| Meaning/Definition | A loan, in general, is money borrowed from a bank, any financial institution, or any individual that is repaid within a stipulated period along with interest. | A mortgage is a money borrowed from a bank or any financial institution by pledging a property with more value than the borrowed money. |
| Type | Loans are of many types, barring Mortgages. Every other loan is an unsecured loan. | A mortgage is a secured loan. |
| Rate of Interest | The loan carried a higher rate of interest. | Being a secured loan, mortgages carry lower interest compared to any other loans. |
| Loan Period | Usually, the loan repayment period is short. | Mortgages have a longer loan payment duration. |
| Categories | Loans are of different categories: Open-end Loans, Close-end loans, Student Loans, and Payday loans. | VA loan mortgage: Reverse Mortgage Adjustable-Rate Mortgage Fixed-rate mortgage |
What is Loan?
A Loan is an amount of money borrowed from a bank, any financial institution, or any individual expecting to pay back. When the loan is paid back, it is paid along with interest.
The rate of interest and the period within which the loan has to be cleared are pre-defined. The loan repayment is made through EMI.
Loans get sanctioned with minimum documents, and it does not require any collateral as with mortgage loans. These loans are commonly known as unsecured loans.
As with unsecured loans, the interest rate is high, and the period is also short. The EMI rates are calculated based on these factors only.
In general, loans are of different types of categories based on financial terminologies. Open-end loans, close-end loans, and Secured and Unsecured loans.
As majorly loans are unsecured, it is under the deed of trust money is given to the customers. However, the customer has to be eligible to avail of the loan.
Though the documents required are minimal, they are critical references for the bank to trace the person if they absconded from repaying the amount.
Loans are indeed not taxable, so the customer need not pay any tax for the amount received as a loan. However, the EMI being paid towards the repayment can help get tax benefits.
What is Mortgage?
A mortgage is a type of loan where the customer borrows money from the bank by pledging a property with more value than the borrowed money. Mortgage loans are secured loans.
Being a secured loan, mortgages have less interest to be paid towards repayment. Usually, the period is more in the case of mortgage repayment, and the money involved is also huge.
A mortgage loan requires a lot of documents, and stringent formalities are involved. An individual can avail of mortgages by mortgaging a house or a business that can mortgage the commercial property for want of funds.
The lender will predominantly be a financial institution like banks or credit unions, and often the loan arrangements are made through intermediaries.
It is to be understood if the borrower fails to repay the amount, then the financial institution takes ownership of the property entirely.
In this way, the loan is secured on both ends. There are a few types of mortgages available; VA loan Mortgage, Reverse Mortgage, Adjustable-rate mortgage, and a fixed-rate mortgage.
Main Differences Between Loan and Mortgage
- The main difference between Loan and Mortgage is the loan-acquiring method. A loan, in general, is the money received by a customer from a bank, any financial institution, or any individual without any security or collateral involved. Conversely, a mortgage is a type of loan where the customer receives the money by pledging a property worth more than the money availed as a loan.
- The rate of interest for loans is comparatively higher than the rate of interest for mortgages.
- The duration for repayment is also short for loans when compared to mortgage loans, as it is always more.
- Loans are considered Unsecured with not many documents required, but Mortgages require a lot of documents and stringent formalities to be followed, which makes it a secured loan.
- Loans, if not paid on time, shall attract serious consequences from the bank’s side, like rigorous follow-up and imposing penalties can happen but with mortgage loans, if the customer is not able to pay back the money, the financial institution shall take ownership of the property pledged.
- https://ageconsearch.umn.edu/record/269633/files/twerp_740.pdf
- https://pubs.aeaweb.org/doi/pdf/10.1257/aer.100.2.490
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
