mp
Arrow

Personal Loans Vs Mortgages

Author image
Len Penzo
Personal Loans Vs Mortgages

When looking for financing, knowing the amount needed, proposed repayment time, and loan purpose are critical to making an informed decision between a personal loan vs mortgage loan.

For instance, while a personal loan is a great option if you need short-term funds because the approval process is quicker than other loans, it can attract a slightly higher interest rate and has a shorter repayment term. A mortgage, on the other hand, is a great choice if you’re looking for a substantial amount. Keep reading to learn more about the benefits and drawbacks of each.

Benefits Of Personal Loans And Mortgages

Personal Loans

  • Tax-Free – You don’t need to pay any tax on the borrowed amount. The only time a tax will be charged is if the lender forgives the outstanding balance.
  • Zero Down-payment – When you take a personal loan, there’s no requirement of a down-payment.
  • Negotiable Repayment Terms – If you’re facing a temporary financial hardship, you can apply for an extended repayment term. This might add extra charges, but is an available option.
  • Accepts Low Credit Scores – You don’t need an excellent credit score to get approved for a personal loan. However, if your scores are low, you’ll pay higher interest rates.
  • Versatility – Personal loans can be used for any number of purposes.

Mortgages

  • Tax Credits – The interest you pay is tax-free. With a mortgage loan, you’re eligible to deduct the necessary expenses from your yearly income tax statements.
  • Get Prequalified – Most mortgages allow you to apply for prequalification. This can help you better budget your purchase as well as get a clearer picture of the potential installments that you’ll be paying.
  • Lower Rates – The APR (Annual Percentage Rate) on mortgages is extremely low compared to other loans. Given this is a type of secured loan, lenders agree to comparatively lower rates.
  • Longer Repayment Terms – On average, mortgage repayment terms range between 15 and 30 years.
  • Available Options – There are a lot of mortgage options available like fixed-rate, interest-only, and adjustable rates.

Disadvantages Of Personal Loans And Mortgages

Personal Loans

  • Smaller Amounts – The approved amounts are lower than other loans. Depending on your credit score, the highest available sum is $100,000. If you don’t have stellar credit, the funding available is very minimal.
  • Higher Interest Rates – When comparing a personal loan vs mortgage, personal loans are meant for quick access to smaller amounts of funds and thus generally feature higher rates.
  • Shorter Term – Personal loans offer a smaller repayment period. The average term for personal loans ranges from one to seven years.

Mortgages

  • Collateral – A collateral is, when you fail to make regular payments on the mortgage then the account gets marked default, the lender can foreclose the account and take possession of the home.
  • Overall Interest – Although the interest rates are lower than most loans, you’ll end up paying a large amount of interest over the duration of the term.
  • Fluctuating Payments – The monthly payments can fluctuate for certain loan types depending on market conditions. For instance, an ARM (adjustable-rate mortgage) is adjusted after a certain period.

What Is Better For Me?

The better borrowing option depends on your financial needs and desired purpose. If you need a relatively smaller amount and are sure that you can manage the higher rates and shorter repayment terms, a personal loan or a moving loan is the right fit. Then again, if you need a large sum and want to lower monthly payments spanned across an extended period, then a mortgage is the better option.

Personal loans are good for short-term needs like an unexpected medical expense, car repair, wedding, home improvements, and more. Still, if you’re looking to buy a house or a similar property, a mortgage ensures that you get approved for a higher sum. You don’t need to pay anything upfront with personal loans and the approval process is quicker and easier. On the other hand, you’ll need a strong credit history and substantial paperwork to get approved for a mortgage.

You should figure out the requirements, the available rates, and your income-debt ratio before choosing either option. The reason is simple: defaulting on payments will lead to an irreparable dent on your credit score and the lender can go as far as suing you or taking possession of the collateral.

Ultimately, your informed decision depends on your unique needs. Compare the options, speak to the preferred lenders, and understand the implications before you apply.