Difference Between Loan and Mortgage

Loan vs Mortgage

Loans can be secured as well as unsecured and they can be for short as well as long durations. The word mortgage only reflects that the loan is secured and the lender has a property as collateral against the sum of money it has given to the borrower. In case of non payment or default by the borrower, the lender reserves the right to sell off the property that has been set aside as collateral to recover its money. Though it is proper to call it as mortgage loan, simply calling a loan as mortgage is enough to convey the impression that some property has been kept with the lender. There are many similarities between loan and mortgage though it is their differences that many people remain confused about. This article will attempt to clarify all doubts in the minds of the readers by highlighting the features of loans and mortgages.

If you need a small sum of money, the banks are ready to give it to you without any collateral on the basis of your bank statement. Such loans are unsecured loans and banks charge a high rate of interest and also full repayment needs to be done in small time duration. These loans are also referred to as personal loans and the borrower may use them for his personal needs such as buying a consumer good, a car, or any other thing that is valuable.

To secure a loan from a bank for business purposes is more difficult, and many more formalities are required to be fulfilled such as financial statements of the business for the last three years, record of bank transactions in the form of statement of account, a project report summarizing how the money is going to be utilized and how the borrower proposes to pay back the loan with the profit earned etc. On top of all these documents, banks may insist on collateral to feel secured. This collateral can be jewelry, fixed deposits, insurance certificates or even the stock of your business. In such cases, you are in effect using your own assets to get the loan and the bank is secure in the sense that in the case of any loss in your endeavor, it can recover the money lent by keeping your assets. This then becomes a kind of mortgage loan.

In general, the word mortgage has become popular because of home loans where the property remains in the name of the bank providing money for the purchase of the property. If you are talking about a home loan, you are allowed to enjoy the luxury of living in it with your family though the home is technically the property of the bank till its repayment is complete. This is a mortgage loan as the property is mortgaged to get the loan. The bank retains the right of foreclosure of the loan if you default or are unable to pay back the EMI’s that have been set for repayment.