Loans are benefited by two parties; People and the Nation. Lending is a system that drives the banking industry to help the economy of a country to grow to sensational heights.
The government takes this opportunity to increase the money supply in the economy. This, in turn, improves the purchasing power of the people.
It is also advised by the experts in the finance domain to watch out carefully while availing a loan from financial institutions. Careful steps to be taken while repaying the debt, as non-payment can lead to serious consequences.
Banks offer attractive loans in various forms for the customers to get benefitted in a short period. Financially speaking, a loan is structured between individual, groups or firms which give money to people with an expectation getting it repaid.
While the repayment happens with the interest, the lending entity uses this for further lending activities. It is indeed a cycle of lending and collecting.
There are many types of loans available in the finance industry. It is not only the individual who can avail of a loan but also businesses. Every loan has its norms, procedures, and interest rates.
The moment the word loan is used, the first thing that strikes the mind is Mortgage. Mortgage and loans are terms interchangeably used in many contexts.
Loan vs Mortgage
The main difference between Loan and Mortgage is the loan acquiring method, Loan, in general, is the money received by a customer from a bank or any financial institution or any individual without any security or collateral involved. Mortgage, on the other hand, is a type of loan where the customer receives the money by pledging a property worth more than the money availed as loan.
Comparison Table Between Loan vs Mortgage (in Tabular Form)
| Parameter of Comparison | Loan | Mortgage |
|---|---|---|
| Meaning/Definition | Loan, in general, is the money borrowed from the bank or any financial institution or any individual which is repaid within a stipulated period along with interest. | A mortgage is money borrowed from the bank or any financial institution by pledging a property that has more value than the money borrowed. |
| Type | Loans are of many types, barring Mortgage every other loan is unsecured loans. | A mortgage is a secured loan. |
| Rate of Interest | The loan carried a higher rate of interest. | Being a secured loan, mortgages carry lower interest compared to any other loans. |
| Loan Period | Usually, the loan repayment period is short. | Mortgages have a longer loan payment duration. |
| Categories | Loans are of different categories: Open-end Loans, Close-end loans, Student Loans, and Payday loans. | VA loan mortgage: Reverse Mortgage Adjustable-Rate mortgage Fixed-rate mortgage |
What is Loan?
A Loan is an amount of money borrowed from a bank or any financial institution or any individual with an expectation of paying back. When the loan is paid back, it is paid along with interest.
The rate of interest and the period within which the loan has to be cleared are pre-defined. The loan repayment is usually done through EMI.
Loans get sanctioned with minimum documents and it does not require any collateral as with mortgage loans. These loans are commonly known as unsecured loans.
As with unsecured loans the rate of interest is high and the period is also short. The EMI rates are calculated based on these factors only.
In general, loans are of different types of categorized based on financial terminologies. Open-end loans, close end loans, Secured and Unsecured loans.
As majorly loans are unsecured, it is under the deed of trust money is given to the customers. However, the customer has to be eligible to avail of the loan.
Though the documents required are minimal, the documents are critical references required for the bank to trace the person if absconded from repaying the amount.
Loans are indeed not taxable, so the customer need not pay any tax for the amount received as a loan. However, the EMI that is being paid towards the repayment can help in getting tax benefits.
What is Mortgage?
The mortgage is a type of loan where the customer borrows the money from the bank by pledging a property that has more value than the money borrowed. Mortgage loans are secured loans.
Being a secured loan, mortgages have less interest to be paid towards repayment. Usually, the period is more in the case of mortgage repayment and the money involved is also huge.
A mortgage loan requires a lot of documents and stringent formalities are involved. Mortgages can be availed by an individual by mortgaging the house or a business that can mortgage the commercial property for want of funds.
The lender predominantly will be a financial institution like banks, credit unions, and many times the loan arrangements are made through intermediaries. It is to be understood, if the borrower fails to repay the amount then the financial institution takes ownership of the property completely.
In this way, the loan is secured both the ends. There are a few types of mortgages available; VA loan Mortgage, Reverse Mortgage, Adjustable-rate mortgage, and fixed-rate mortgage.
Conclusion
Loans drive the economy of the country. The purchasing power of the customers shall improve through loans. The repayments must also be taken into consideration by the customers as the statistics say 12% of the people who avail loan default in not paying the loans on time.
Loan repayment compliance can bring a sea change in the banking norms. It requires proper financial planning and diligence. The aspect to be kept in mind is, the loan repayment can at times reach up to two times the loan availed. Financial experts advise people to think many times before availing any loan from the banks.
References
- https://www.lancaster.ac.uk/media/lancaster-university/content-assets/documents/lums/economics/working-papers/FundingHigherEducation.pdf
- https://ageconsearch.umn.edu/record/269633/files/twerp_740.pdf
- https://pubs.aeaweb.org/doi/pdf/10.1257/aer.100.2.490