Personal loans as well as mortgage, both are among the most sought-after loan options. They are unavoidable in financial lives. If one is the saviour during the little size money mess, the other buys you a roof of a dream. In several situations, both face each other to compete in importance.
A personal loan has many uses while mortgage has many types. No doubt, both are significant in their respective roles. At some point, they clash in their roles, and that creates the need for comparison.
However, this competition is healthy and adds another chapter in your understanding of money matters.
To play safely in your finances, it is necessary to stay aware of the loan products. At the last moment, you never have sufficient time first to gather the details and then make a decision.
What is the need to discuss the difference?
At some facets, personal loans and mortgage demand a comparison. Read the reasons of the logic below to know where they differ and contradict.
There are many points, which can describe that difference. Knowing them in detail can always be beneficial for you.
Information is the most reliable way to defeat ignorance in your future decisions. Everything in this materialistic world revolves around money, and no doubt, loans provide us with that. Their varied versions should remain in our sound knowledge.
|It is always small in a tenure that spans from a few months to a maximum of 7 years.||It is always of long tenure that extends up to 30— 40 years.|
|The loan amount is never large in size. From some hundreds of Pounds to maximum thousands.||The loan amount is always significant and sometimes huge according to the property price.|
|Personal loan lender considers the debt-to-income ratio.||Mortgage lender considers LTV i.e. Loan-to-value ratio.|
|Funds are attainable through the online procedure without any physical verification. Only a few steps are required.||Mortgage can never be obtained through paperless online procedures. The physical presence of the lender, the borrower, is necessary. The home inspection is also required.|
|Approval decision comes quickly. Fund disbursement can happen on the same day.||Approval decision happens instantly. Disbursement takes place only after several formalities.|
|Interest rates are high and remain similar throughout the tenure.||Interest rates are always lower than the personal loan.|
|Repayment terms are smaller, but the instalment amount can be hefty.||Repayment terms are long and the instalment amount is short in size.|
|A personal loan can be covered under debt consolidation.||Mortgage cannot be covered under debt consolidation.|
|A personal loan is generally not tax-deductible. But exceptional cases are there. The interest rate on credit card, car loan etc. can be reduced.||In a mortgage, interest paid on buy-to-let mortgage instalments is tax-deductible while the interest paid on a mortgage of property for personal use cannot be reduced from tax.|
|A personal loan has two types and used for varied purposes. The types are unsecured and secured. Education, holiday, medical reasons, arrange deposit money. A secured personal loan can be a car loan.||The mortgage has several types and is used for only one purpose, i.e. property buying. Types are – remortgage, buy-to-let, mortgage for moving home, commercial mortgage.|
|No security or collateral required. The only guarantor is necessary.||The mortgage is uncompromised on the collateral condition. The purchased property acts as security.|
|Higher approval rate due to the small amount limit.||Lower approval rate due to the more significant amount included.|
|Usually, no product fee is included.||A product fee is there that can go up to £1000.|
|A personal loan can replace the mortgage if the amount is small. Maximum £500,000 can be obtained. Many times, it is used in the place of remortgage.||Mortgage can never replace personal loan in use. Its use is for only property buying.|
|A personal loan has alternatives like a credit card, savings, return on an investment etc.||A mortgage has no alternatives. Other sources of money can only support to deduct the amount of loan.|
|Default on personal loan brings the consequence of bad credit score, legal notices, and as a last resort, imprisonment may happen.||Default in mortgage causes loss in credit rating also legal notices, and finally, the lender takes the possession of the house.|
|Bad credit scorers can also obtain if they have a good repayment capacity.||Poor credit scorers can obtain but may need an online mortgage broker in the UK to find a suitable deal faster, as it is a long-term loan. Lenders that are ready to take risk are less in number.|
|It can be not very easy for a personal loan bearer to obtain a mortgage due to less space on creditworthiness.||It is easier for a mortgage borrower to obtain a small amount of personal loan. It demands less space in creditworthiness.|
|A personal loan can be taken through peer-to-peer lending. The money is borrowed from several people, and they all get their share with interest as the repayments.||Mortgage cannot be obtained through peer-to-peer lending. The borrowed money is repaid only to the mortgage company.|
|There is no interest-only repayment method in this loan.||Mortgages can be attained based on interest-only repayment mode. Pay only interest in instalments and pay the principal at last when the tenure ends.|
|In exchange for money taken in a personal loan, a person does not necessarily get the ownership to an asset. It happens only if it a secured loan like machine loan. Funds can be taken for a small financial crisis or to organise a party.||In exchange for money borrowed, the person gets the ownership of a home. However, until the borrower does not pay off the loan entirely, the legal rights of the property remain with the lending company.|
The contradictions above are not stressful because they equip you with the necessary information. For a better financial future and decisions without any regret, you should know about everything. In direct words, financial literacy is the actual key to a prosperous tomorrow.
No matter how different personal loan and mortgage are in nature and features, they both are irreplaceable in importance. None of them can be neglected. With the capacity to fulfil varied short-term and long-term financial needs, the loan types are the rescuers of tough times. Now when you know both the sides of a coin, you can take better turns on small needs as well as on the big ones.
Description – Know the reasons for the contrast between personal loan and mortgage. They are many, and all present a different side of both the types of the loan.
Contributors:- “Stacey Walsh” founder of a famous mortgage company “shinemortgages” in the UK she is a Writer and Financial Analyst.
A special thanks from the Personal Loan Xpress Team about her great contribution in this article.
I am Ram, I have completed Master of Commerce, I am Finance writer and Personal Loan Advisor in Personal Loan Xpress. I love to write finance articles and i consult the people regarding their financial decision with my Expertise.