What is a Loan?
A loan is a type of financial instrument that involves borrowing a certain amount from a lender, with the agreement that the borrowed funds will be repaid and interest at a later date. Loans can be used for various purposes, including financing the purchase of a home or a car, paying for education, or providing working capital for a business.
There are many different types of loans. Different loans have different terms and conditions involved. Some common types of loans include personal, auto, and business loans. Personal loans are unsecured loans that can be used for various purposes. Auto loans are specifically used to finance a vehicle purchase, and business loans are used to provide working capital for a business.
Overall, loans can be a valuable financial tool for individuals and businesses, providing a source of funding for various purposes. However, it is essential for borrowers to carefully consider their options and choose a loan that is appropriate for their needs and financial situation. Generally, borrowers with a strong credit history and a stable income can quickly get a loan.
What is a Mortgage?
A mortgage is a type of loan that is used specifically to finance the purchase of a home. The borrower receives the funds from the lender and is obligated to pay back the amount and interest within the decided time. The home is collateral for the loan, meaning the lender can legally claim the mortgaged home if the borrower fails to pay the due amount.
Banks and other financial institutions offer mortgages, and the terms of a mortgage include the interest rate and the length of the repayment period. In most cases, the borrower must make a down payment on the home – a percentage of the purchase price paid in advance. Borrowers need to shop around and compare the terms and rates of different lenders.
The monthly payments on a mortgage include both principal and interest. As the borrower makes payments on the mortgage, the principal balance decreases, and the borrower builds equity in the home. Mortgages are paid off over 15 or 30 years. Usually, the monthly payment on a mortgage is higher for a loan with a higher interest rate and a more extended repayment period.
Difference Between Loan and Mortgage
- A loan is a general term for a financial instrument that involves lending money from one party to another. In contrast, a mortgage is a specific type of loan for purchasing a home.
- A loan can be secured or unsecured, depending on whether the borrower pledges collateral to the lender, whereas a mortgage is always secured by the home being purchased.
- The terms of a loan and the length of the repayment period can vary, whereas the lender and home value determine the terms of a mortgage.
- The monthly payments on a loan may consist only of interest, whereas the monthly payments on a mortgage include both principal and interest.
- Loans are provided by banks and other financial institutions, whereas mortgages are also offered by government agencies and private lenders.
Comparison Between Loan and Mortgage
| Parameters of Comparison | Loan | Mortgage |
| Meaning | Borrowing and Lending of Money | Special Type of Loan for Buying a Home |
| Security | Secured & Unsecured | Always Secured |
| Terms & Conditions | Vary with Interest Rate and Length of Repayment Period | Determined by Lender and the Home Value |
| Interest | Only Interest in Monthly Payments | Interest with Principal in Monthly Payments |
| Provision | Banks & Financial Institutions | Agents & Private Individuals |