What is the difference between a mortgage and a loan?
Understanding the differences between a loan and a mortgage is crucial for making the right financial decisions. While both involve borrowing money, their purpose, structure, and repayment terms differ. In India, knowing these differences can help individuals choose the right financial product for home purchases, business expansion, or personal expenses.
What is a loan?
A loan is a sum of money borrowed from a lender, which must be repaid with interest over a fixed period. Loans in India are broadly classified into:
- Secured loans – These require collateral, such as property, gold, or fixed deposits. If the borrower fails to repay, the lender can seize the collateral.
- Unsecured loans – These do not require collateral but usually have higher interest rates due to the increased risk to the lender.
Also Read: Home Loan: All You Need to Know – Godrej Capital
People can take loans for different reasons which could include business, education, wedding plans or medical emergencies. Financial institutions such as banks, NBFCs (Non-Banking Financial Companies), and online lending platforms are the major sources of these funds. They also come with flexible repayment periods.
What is a mortgage?
A mortgage is a type of secured loan where real estate property is used as collateral. In India, a mortgage is commonly used for:
- Buying a home – Home Loan allow individuals to purchase residential properties.
- Loan Against Property (LAP) – Existing property is used as collateral to borrow money for personal or business needs.
Unlike general loans, mortgage loans are specifically tied to property transactions. They typically have longer repayment tenures, making them ideal for substantial financial commitments.
Comparison between a loan and a mortgage
Understanding the difference between loan and mortgage is essential for making informed financial decisions. While both involve borrowing, a loan is a broader term, whereas a mortgage specifically refers to a secured loan backed by property.
| Feature | Loan | Mortgage |
| Purpose | Loans can be availed for various needs such as education, travel, medical expenses, weddings, or business-related purposes. | Mortgages are primarily used to purchase real estate or borrow funds by pledging a property as security. |
| Security | Loans can be secured or unsecured. Personal loans, for example, are usually unsecured and don’t require collateral. | Mortgages are always secured and require the borrower to pledge a property as collateral until the loan is repaid. |
| Interest Rates | Interest rates on loans, especially unsecured ones, are usually higher due to increased lender risk. | Mortgage interest rates are generally lower as the loan is backed by a tangible asset (property). |
| Loan Amount | Loan amounts vary widely and are typically smaller, especially for unsecured loans. | Mortgage loans offer higher amounts as they are secured against high-value assets like property. |
| Repayment | Loan tenures are shorter - typically ranging from 1 to 7 years, depending on the type of loan. | Mortgages have longer repayment periods, often ranging from 10 to 30 years, making them more suitable for large-scale, long-term financing. |
Home Loan vs. Mortgage Loan in India - How They Differ
In India, understanding the difference between a home loan vs mortgage is crucial. While a home loan is used to purchase or construct a house, a mortgage loan involves borrowing against an existing property for various financial needs.
- Home Loan: A home loan is specifically designed for the purchase, construction, or renovation of a residential property. It is a secured loan, with the property being financed serving as collateral. Home loans generally come with lower interest rates compared to other loan types and offer tax benefits under Section 80C and Section 24(b) of the Income Tax Act. Eligibility is typically based on income, credit score, employment stability, and repayment capacity.
- Mortgage Loan (Loan Against Property – LAP): A mortgage loan, often referred to as Loan Against Property, allows borrowers to pledge an existing residential or commercial property to raise funds. These funds can be used for business expansion, higher education, or medical emergencies. While interest rates may be slightly higher than home loans, LAP offers flexible usage. However, tax benefits are limited and only apply if the loan is used for business purposes. Eligibility depends on property value, income, and repayment history.
Also Read: What is Loan Against Property? - Features, Eligibility, Documents, and more.
When Should You Use a Loans and Mortgages
Choosing between a loan and a mortgage depends on your financial need, repayment capacity, and the purpose of borrowing. Understanding home loan vs mortgage helps you select the right option for short-term or long-term goals. Here’s when to use each:
When to Use a Loan
- Ideal for personal needs such as travel, weddings, or emergencies.
- Suitable for education financing or skill enhancement courses.
- Helps in buying a car or funding other lifestyle upgrades.
- Best for short-term funding where collateral may not be required.
When to Use a Mortgage
- Perfect for purchasing a home, where the property serves as collateral.
- Suitable for refinancing real estate or consolidating debt using owned property.
- Recommended for long-term borrowing, where the loan is secured against property and comes with structured EMIs.
How to choose the loan and Mortgage option
Choosing between a loan and a mortgage depends on the purpose of borrowing. If you need funds for personal or business use, a general loan may be the right option. However, if you are purchasing a home or need to leverage an existing property for funds, a mortgage loan is the better choice.
Looking for the right loan option to meet your financial goals? Apply for Loan today itself and get the money you want, tailored to your needs.
Moreover, an Home Loan EMI calculator can help you achieve clarity on your EMIs by telling you the exact amount you need to pay as your EMIs per month.
FAQs
Q.1. What is better, a loan or a mortgage?
A. The main difference one needs to consider here is interest rates. Mortgage lenders carry more risk for the lenders, which is why interest rates are slightly higher for mortgages. On the other hand, interest rates for loans vary based on whether they are secured or unsecured.
Q.2. Does a mortgage count as a loan?
A. Yes, a mortgage does count as a loan. For this, a piece of property is considered as collateral on the repayments. Loans, contrastingly, can be secured or unsecured.
Q.3. What is the disadvantage of taking a mortgage?
A. One of the biggest disadvantages of taking out a mortgage is the long-term financial commitment involved. It is easy to get stuck in the cycle of paying EMIs for decades, which can turn out to be a financial burden if not planned well.
Q.4. Is it good to buy a mortgaged property?
A. Buying a mortgaged property in India can be an excellent option. One gets a ready-to-move-in home at a discounted price even though the process involves a lot of steps.
Q.5. Can you pay off a mortgage early?
A. Yes, you can pay off your mortgage early. This is referred to as prepaying a mortgage. However, this prepayment can come with a prepayment penalty.
Q.6. Is a home loan for affordable housing considered a mortgage?
A. Yes, a home loan - even for affordable housing loan - is considered a type of mortgage. It is a secured loan where the purchased property is pledged as collateral. The key difference lies in the purpose: while general mortgage loans (like Loan Against Property) can be used for various needs, a home loan is specifically meant for purchasing or constructing a residential property.
Disclaimer:
The contents of this article are for information purposes only and not a financial advisory. The information is subject to update, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any decisions, financial or otherwise based on the contents and information mentioned. For more information, please visit www.godrejcapital.com.
Connect with Our Customer Support Team
Customer Support
