What is the difference between a mortgage and a loan?

A lot of people get these two mixed up. Sometimes, people will go looking for a mortgage when they really want a loan. Other times, people will try and get a loan when they actually need a mortgage. Fundamentally, they are the same thing. But it's important to understand why it is necessary to refer to them by different terms. First, let's look at definitions:

A loan is simple. You borrow some money from another party, and then pay it back to them. The term over which you borrow that money could be anything from 6 months to 5, 10,15 or even 25 years. However, in general you would be more likely to want a mortgage if you need to borrow for 25 years, because of the lower interest rates, but more about that later. You pay a loan back normally in monthly instalments, which include both the capital (or principal) and the interest on that capital. Loans can be unsecured, meaning you do not have to provide any security as a guarantee that you will pay it back, or secured, in which case you do. Because most loans are paid back over short periods, you'll find that the interest rate, or APR on them will be higher than with a mortgage.

A mortgage is a long-term loan, running for a fixed period (typically about 25 years), that is secured on your home. Usually a mortgage is used to buy a home, but it can also be used by those who already own a home as a way to gain access to a better or more competitive product (ie. better interest rates) or maybe to raise more capital to use for home improvements, school fees or business investments. Whilst mortgages traditionally run for 25 years, they are becoming more and more flexible every year, allowing you to make early repayments, or even to extend your repayment term. In purely legal terms - your mortgage is actually a deed which pledges the freehold or leasehold property that you own as security for a loan. In return for receiving money from the lender, you give them certain rights - such as the authority to sell that property if you are not maintaining your payments.

So, if you need to buy a house - you'll need a large sum of money, which you are unlikely to be able to pay back quickly out of your income, so you'll need to borrow it over a long period. Thus you will need to get a mortgage. Because of the large amount of money borrowed and the length of time it is borrowed for, mortgages are cheaper in terms of interest than a loan. You use a loan for smaller amounts over shorter periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

Loans

Ask About

> Loans Advice
> What is a personal loan?
> What is a secured personal loan?
> What is an unsecured personal loan?
> Do companies specialize in student loans?
> What is the difference between a bank loan and a personal loan?
> Will I be able to get a loan if I have bad credit?
> I need to consolidate my debts, is it advisable to get a consolidation loan?
> What is a bridging loan?
> How do I find the cheapest rate for loans?
> How do I find a low interest loan?
> What is a career development loan?
> I am a tenant, how am I able to get a personal loan?
> What is a home improvement loan?
> Can I take out payment protection on the loan?
> Is Payment Protection Insurance Suitable for me?
> Can I claim on PPP if I am suffering from stress or mental illness?
> What is the difference between a mortgage and a loan?
> What is a business loan?
> How are Business Loans structured?
> Should I get a Small Business Loan?
> What is a home equity loan?
> What are the tax laws on UK loan interest?
> How do I get an online loan?
> What kinds of loan company can I find?
> What is a Flexible Loan?
> How do I apply for a loan?
> How do I get a fast loan?
> How do I get an easy loan?
> How do I use a loan calculator?
> How do I get a fast cash loan?
> How is my loan rate calculated?
> How do I compare APRs?
> What is credit scoring?
> Why do some lenders decline my loan applications?
> What is a credit reference agency?
> What do I do if credit reference agency information stops me getting credit?
> What do I do if I get into loan repayment Difficulties?
> What are the alternatives to taking out a loan?
> What are the different types of loan interest?
> What are car loans