Which loan is right for you: Personal loan vs. mortgage? Find out now | Mint

If you are considering loan options and are having a tough time in choosing between a personal loan and mortgage, it is important to consider a few factors so that you can make the right choice. While personal loan and mortgage loans have their own advantages and disadvantages, their few unique features can help you choose the right deal for you.

Understanding personal loans

Personal loans are unsecured loans, which means you do not require collateral in order to apply for the loan. These loans are offered to you based on your credit score as well as your credit history. This is why these loans generally offer higher interest rates as compared to other loans in the market due to the increased risk for the lender.

Key features of personal loans

No collateral: Since personal loans are unsecured, there is no requirement for pledging assets. This way you won’t lose your valuable assets if you make a default in repayment.

Fast approval and disbursal: With the application process being simple and quick, it usually takes less time to get approved and the funds will be disbursed to your account as soon as possible.

Flexible usage: The funds can be used for any purpose as per your convenience.

Factors to consider for personal loans

High interest rates: personal loans are unsecured, and thus the lender will often charge higher interest rates to compensate for the risk.

Loan amount limitations: For personal loans, the loan amount granted to you is generally restricted based on your income and creditworthiness which is usually lower than a secured loan.

Credit score: It is advisable to have a good credit score to get the lowest terms on your personal loan. In case you have a low credit score, you may struggle to get personal loans or get high interest rates with smaller principal amounts.

Understanding mortgage loans

Mortgage loans are secured loans where borrowers pledge an asset, typically real estate, as collateral. These loans are mostly used to purchase property or to use the existing property as collateral to get a loan.

Key features of mortgage loans

Secured loans: Mortgage loans are secured loans, hence, they usually come with lower interest rates than personal loans.

Higher loan amounts: The loan amount is based on the value of the pledged property, allowing you to get higher loan amounts.

Larger repayment tenures: The repayment period for mortgage loans is longer, making monthly instalments easier to afford.

Factors to consider for mortgage loans

Collateral requirement: You are required to pledge property as collateral. This way in case you make a default in repayment, you may lose ownership of your pledged asset.

Lengthy processing time: The approval process involves thorough evaluation, including property appraisal and legal checks, which makes processing time longer than other loans.

Documentation: Mortgage loans require extensive documentation related to the property and your financial status.

Personal loans vs. mortgage loans: Which one to choose?

Purpose of the loan: If you need funds for a specific purpose like purchasing property, a mortgage loan can be a better option for you. However, if you want to get quick funds for your personal expenses or an emergency, a personal loan might be a more suitable option for you.

Urgency: Personal loans offer quick disbursement, making them ideal for urgent financial needs. On the other hand, mortgage loans, due to their comprehensive evaluation process, take longer to process.

Loan amount and repayment capacity: Mortgage loans are beneficial in case you require a higher amount of funding and you have the capacity to provide security. However, if you require smaller loans without the need for collateral, then personal loans are better for you.

Interest rates: If securing a lower interest rate is your priority and you are willing to pledge collateral, a mortgage loan can be convenient for you. On the other hand, if you prefer an unsecured loan despite a higher interest rate, a personal loan is the way to go.

In conclusion, choosing between a personal loan and mortgage loan is a subjective decision. However, you must note that your credit score is an important factor in determining your eligibility for loans. Hence, make sure that you make timely repayments of your EMIs and plan your repayment journey wisely. This way you can not only fulfil your financial obligations but also build a strong credit profile.

(Note: Raising a loan comes with its own risks. So, due caution is advised)