Introduction
There are two great options to fulfil the need for finance. They are personal loans and mortgages. People often get confused between the two. Both loan products are distinct from each other and have their own pros and cons. In this blog, we will study in detail the differences between a Personal loan Vs Mortgage and decide which is perfect for you. Before we proceed, let’s understand the meaning of both.
What is a Personal loan and a Mortgage?
A personal loan is an unsecured loan which do not require any collateral. There is no end usage restriction, hence you can use it for whatever purpose you want. Personal loans have higher interest rates. They have quick disbursements.
A mortgage is a secured loan. You need to give your property as collateral against a loan. The valuation of the property is used to calculate the loan amount. The interest rate is lower because collateral is involved.
Difference Between Personal Loan and Mortgage
Now let’s understand the difference between a Personal loan vs Mortgage
1. Purpose of Loan
Due to its versatility, personal loans can be used for a number of things, including debt reduction, weddings, and medical emergencies.
Mortgages are specially designed for higher-value needs like real estate, business expansion, refinancing, etc.
2. Nature of Loan
Personal loans are collateral-free loans. You don’t have to pledge any property to get a personal loan. Hence very large no of people are able to apply for personal loans.
Mortgage loans are secured loans where you need to pledge your property as collateral. If you default on payment, then the lender can take your property.
3. Interest Rates
Personal loan interest rates are quite high. This can range between 10-24% depending on your income, employment, credit score, and various other factors.
Comparatively, mortgages have low interest rates as there is collateral involved. It can range from 7-14% depending on loan amount, property value, and market conditions.
4. Loan Amount
Personal loans are of a very small amount compared to mortgage loans. This can range from ₹10,000 to ₹10 lakhs.
Mortgages are based on 60-85% of the property value. Hence, the loan amount is quite high. At times, it can be crores.
5. Repayment Tenure
The repayment tenure of personal loans is quite short. This can range from a few months to a few years.
Mortgages have a longer tenure as the loan amount is quite high. This can be for 15, 20, and even 30 years.
6. Documentation
A personal loan requires basic documentation like KYC and income proof.
A mortgage requires lengthy paperwork. This includes property papers as well as legal and valuation assessments.
7. Approval Processing Time
The approval processing time for a personal loan is very short. Here, the loan is processed based on your basic documents. Hence, the process is very quick.
The approval processing time is quite long for a mortgage. It can take a few weeks to approve. Lenders here assess property value, debt-to-income ratio, and conduct a legal check.
8. Taxation
There is no direct tax benefit on personal loans. But if you take personal loans for a specific purpose like home renovation, then you can get a tax benefit.
On a mortgage, you get tax benefits of Section 80C and Section 24 of the Income Tax Act for principal and interest repayment.
Personal Loan or Mortgage: Which is for You?
Now the question arises, that a personal loan or mortgage which is right for you. This depends on an individual’s financial goals and requirements.
1. Reason for loan
If you need a loan for a specific purpose like property purchase, then it’s better to go for a mortgage loan. But if you need quick funds for some personal expenses or an emergency, then a personal loan is a better option.
2. Urgency
Personal loans are disbursed very fast. Sometimes in less than 24 hours. Whereas mortgage loans take a very long time to process, as it has a complex evaluation process. Hence, for urgent needs personal loan is an ideal choice.
3. Loan Amount
If you need a high amount of funds and you can provide collateral, then it’s advisable to go for a mortgage. If you have a small requirement and don’t have collateral, then you can opt for personal loans.
4. Interest Rates
If you want funds at a lower interest rate and you can provide collateral, then a mortgage is more convenient. But if you don’t have collateral and you are ready for an unsecured loan, even at a high interest rate, then you can go for a personal loan.
Conclusion
So now you have clearly understood the difference between a Personal loan Vs Mortgage. Going for a personal loan or a mortgage depends a lot on your needs and preferences. You can understand your situation and then decide which option to opt for. You shall analyse your goals and the purpose of the loan before you take the final decision.
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