The average American holds a debt balance of $96,371. While this number might seem high, the cost of buying a house and car has increased.
Of course, for most Americans, it also means they have more credit card debt, too. Only 53% of Americans can say they have prioritized emergency savings and have more of it than credit card debt.
Wondering about a personal loan vs. a mortgage loan?
With many types of loans available, more people are using loans to make big purchases and to pay down various credit card debts. The housing market remains pretty busy even with rising interest rates. So, more homebuyers are adding mortgage debt.
With so many loan options available to borrowers, you might wonder about the differences between a personal loan vs. mortgage loan. Read on to learn more about these different loan types and when you’d use each type.
Private loan acquisition is on the rise. In 2022, US consumers held $177.9 billion in personal loan debt. The average personal loan size is $9,896.
So, what is a personal loan, and why are so many people seeking them out and holding such large debt balances?
A personal loan is one type of loan that an individual can borrow and use for nearly any type of purpose, from paying off debt to making a big purchase or taking a vacation.
A personal loan is unique from a mortgage; that is also a type of loan for a few reasons. More on this shortly.
Of the many types of loans available, you might be most familiar with a mortgage. A mortgage is a type of loan used to purchase a home.
While a mortgage is still technically a personal loan, it’s different in many ways, too. Securing a mortgage usually requires a more significant amount of money than a borrower would get in a personal loan.
A mortgage loan is unique because it can only get used to purchase a home. It also comes with many qualifying requirements, considering the large amounts borrowed. In fact, the average new mortgage amount is $453,000.
Both personal loans and mortgages are types of loans. In both cases, a borrower secures a loan to get paid back over time.
There are some critical distinctions between the two types, however. Let’s look at the differences between these two types of loans.
One key difference between a personal loan and a mortgage is the loan term length. The loan term is the time a borrower has to repay the loan.
Aside from the vast difference in the amounts being borrowed between a personal loan and a mortgage, the loan term is also typically quite different, too.
A personal loan usually gives a borrower a much shorter term to repay the loan, with a maximum time of seven years. Most personal loans have loan terms that last only a few years.
A mortgage has a much longer repayment term because the amounts borrowed are much more significant. Most mortgage loans give borrowers up to 30 years to repay the balance. Some mortgages have terms of 15 years.
Of course, the longer time to pay back can be good; it also means the borrower is paying interest for a more extended period.
One difference between these two types of loans is whether they require a down payment.
A personal loan doesn’t require a borrower to have a certain amount of money to qualify for a loan. The borrower’s credit score and ability to repay the loan would be considered.
Since a mortgage loan is for much more money, many lenders want the borrower to come to the table with some cash towards the purchase of the home. This is the down payment amount.
Each lender is different; some want the borrower to have as much as 20% of the cost of the home to qualify for a mortgage. Some specialized mortgages don’t require a down payment, but the amount available to borrow might be lower.
If a borrower can’t produce a down payment of at least 20% towards the price of the home, they’ll need to pay PMI or private mortgage insurance. This type of insurance protects lenders when the borrower puts very little of their own cash into the purchase.
The interest rate a borrower pays is often a critical difference between a personal loan and a mortgage.
A personal loan typically lends out a smaller amount of money yet comes with a higher interest rate. This rate is higher because the loan is unsecured. The lender is giving the money based solely on the borrower’s credentials.
A mortgage loan will typically come with a slightly lower interest rate attached to the loan than a personal loan would. This is for several reasons.
The loan amount borrowed is much more significant, and the borrower will pay interest for a much extended period. The lender still makes a considerable amount on the loan because of the terms of the loan.
Another difference between a personal loan and a mortgage is whether the loan is secured or not.
If you borrow money in a personal loan, it’s unsecured. This means there’s no collateral connected to the loan. If the borrower defaults on the loan, the lender can’t come and take the collateral.
They can report to the credit bureaus and use other methods to collect their money, but there’s nothing they can come and take to make up for the loan money that isn’t being paid back to them.
On the other hand, a mortgage is a secured loan. The house being purchased with the loan becomes collateral in the loan agreement.
If the borrower defaults on the loan, the mortgage lender can take the house back to compensate for the loan’s lost money.
The collateral in the house is a security measure for the lender since the amounts being lent out are much larger than you might find in a personal loan.
The differences in loan amounts should be more obvious now. Personal loans are typically for smaller pieces since they aren’t secured.
Since they’re being used to buy a home, mortgages are more significant loan amounts. The house being purchased is a security for the lender if the borrower defaults while paying back the loan.
There are a few restrictions about what you can use a personal loan for.
You might have an emergency and insufficient savings to fix your furnace or car. You might need money for another type of unexpected bill.
You might get a personal loan to consolidate debts and have only one payment instead of multiple ones. This could also save you in interest costs over the life of the loan.
You might decide you want a vacation and will use the personal loan to pay for the vacation. Then you’ll pay back the loan balance over time.
Any large purchase or expense you can’t cover with savings could warrant a personal loan.
While the purpose of a personal loan may vary depending on the borrower’s needs, a mortgage loan doesn’t vary. If you take out a mortgage, the lender expects you to use the money to purchase a home.
You can’t take out a mortgage and divvy up the money for different purposes. The lender will want to know specifics about the property being purchased with the mortgage.
You are wondering which are the best loans to pursue. The answer depends on your buying needs. What do you need financing with the potential money you want to borrow?
A personal loan can get used for a variety of purposes and needs. A mortgage can only be used to buy a house.
You might use a personal loan for home renovations or repairs, but you wouldn’t use them for the home purchase.
You already know that in many cases, a mortgage lender wants you to come to the borrowing table with some cash towards your down payment.
You might wonder if you could take out a personal loan to be used as your down payment. The answer is no. It’s one of the few restrictions you’ll find with the uses for personal loans.
The mortgage lender wouldn’t want you to have more debt in the form of a personal loan just to have more down payment toward the house you hope to buy.
When comparing a personal loan vs. mortgage, they have some key differences. In both cases, you’ll pay interest over a set term, but the amount borrowed and what you can use the loan for will be different.
If you’re interested in learning more about personal loans or need to borrow some money, we can help. Check out our page for more information and how to apply for a personal loan today.