Do you know what mortgage and loan are specifically? And is financing the same as a loan? What to choose in case of need? Here are the differences and uses.
What is the difference between a mortgage and a loan? When you face major expenses or carry out projects such as renovating a house, it is essential to choose the most suitable form of credit between a mortgage and a loan. Although both provide liquidity, the differences are significant.
Mortgage and loan can satisfy different financial needs, but their structure, purpose and conditions vary greatly and must be understood especially in those borderline situations. In fact, when you have to buy a house, the choice immediately falls on a type of mortgage among the many available; just as if you need liquidity to buy a car, the consumer already knows that he will have to resort to a loan or financing. But the terminology is not always clear to everyone.
In this guide, we will explore the differences between mortgage and loan, analyzing their mechanisms, advantages and disadvantages to help you make the best decision based on your financing needs.
What is a mortgage and how does it work
The mortgage is a long-term financing, mainly intended for the purchase of real estate such as houses or their renovation. The sum disbursed is usually high and the repayment occurs through monthly installments for a period that can reach up to 30 years.
Here are the main characteristics of the mortgage:
- high amount: mortgages are generally granted for high amounts, often up to 80% of the value of the property. This allows you to finance significant purchases such as the purchase of a house, reducing the need for an immediate disbursement of large sums of money;
- long duration: the duration of a mortgage can vary from 15 to 30 years and in some cases even longer. This time extension allows the payment to be diluted in lower monthly installments, making the purchase of a property more accessible for many families;
- real guarantee: the mortgage is guaranteed by a mortgage on the property purchased. This means that the property serves as a guarantee for the lender, providing additional security to the bank and allowing for more favorable interest rates;
- interest rate: the interest rate of the mortgage can be fixed, variable or mixed. The fixed rate maintains the same percentage for the entire duration of the mortgage, offering stability in monthly payments. The variable rate, on the other hand, can change over time, generally based on a reference index. The mixed rate combines elements of both types, providing flexibility.
A typical example of a mortgage is one used to buy a house worth 300,000 euros, with a duration of 30 years and a fixed interest rate of 4%. This type of mortgage allows you to spread the cost of the property over a long period of time, making monthly payments more manageable.
| Advantages of a mortgage | Disadvantages of a mortgage |
|---|---|
| Low interest rates | Long-term commitment |
| Possibility of buying a house and renovating it | Required guarantees (mortgage) |
| Tax deductions | High initial costs (appraisal, notary, commissions) |
What is a loan and differences with financing
Before explaining what a loan is and how it works, let’s clarify the terms.
The personal loan is a sum of money granted to meet a wide range of financial needs, such as purchasing a car, renovations or other personal expenses; it is short-medium term and the amounts disbursed are generally lower than mortgages and the repayment occurs over a period that varies from 12 to 120 months.
Often "loan" is used interchangeably with financing, but not in all situations the nomenclature is similar to the same meaning. While a loan is usually a sum of money granted directly to the applicant for personal needs, a financing may involve an intermediary between the credit institution and the consumer, and is a broader term that includes various forms of credit intended for both individuals and businesses for different economic purposes.
In any case, the main characteristics of a loan properly speaking include:
- modest amount: compared to mortgages, personal loans are ideal for modest amounts, adapting to immediate and less onerous financial needs. Often, it is not necessary to specify the purpose of the loan;
- short or medium duration: the duration of personal loans usually varies from 1 to 10 years, offering a faster repayment plan than traditional mortgages;
- no collateral: unlike mortgages, personal loans do not require collateral like mortgages, although they may require other forms of collateral such as a surety bond;
- interest rate: usually fixed, personal loans offer a fixed interest rate, established at the time the contract is signed, ensuring stability in the payment of installments.
A practical example of a loan could be a sum of 10,000 euros to finance a home renovation, to be repaid in 5 years with a fixed rate.
| Advantages of the loan | Disadvantages of the loan |
|---|---|
| Flexibility: can be used for various purposes and has faster approval times | Higher interest rates than mortgages |
| Less long-term commitment | Smaller amounts |
| No collateral | The interest paid is not deductible |
What is the difference between a mortgage and a loan?
Understanding the differences between a mortgage and a loan is essential to making an informed choice. Here are the four main aspects to consider.
- Purpose: a mortgage is specifically intended for the purchase of real estate, such as a house or apartment. This makes it the ideal choice for those who intend to buy a property. On the contrary, a loan is much more versatile and can be used for a wide range of purposes, such as financing home renovations, buying a car, covering medical expenses or supporting personal projects.
- Guarantees: one of the most obvious differences between a mortgage and a loan concerns the guarantees required. To obtain a mortgage, it is necessary to provide a mortgage on the property purchased, thus offering real security to the bank. On the other hand, personal loans do not require real guarantees, making them accessible even to those who do not own an asset to mortgage.
- Amount and duration: Mortgages are generally designed for large amounts, reflecting the cost of the property, and have long durations that can extend up to 30-40 years. This allows the repayment to be spread over a longer period, making the monthly payments more sustainable. Loans, on the other hand, are usually granted for smaller amounts and have shorter durations, usually between 1 and 10 years, allowing you to solve immediate financial needs without committing yourself for decades.
- Interest rates: Interest rates represent another significant difference between a mortgage and a loan. Mortgages tend to have lower interest rates thanks to the guarantee offered by the mortgage on the property. This security allows banks to offer more favorable conditions. Personal loans, on the other hand, having no real guarantees, generally have higher interest rates to compensate for the greater risk assumed by the credit institution.
Original article published on Money.it Italy. Original title: Le differenze tra mutuo e prestito e quale scegliere
