It is always a wise decision to do your homework before making any money-related decisions. Having little knowledge about financial services can change your financial future.
In this article, you will learn about the basic terminologies related to loans and mortgages and the difference between the two as well.
What is a loan?
A loan is an amount of money lent from a financial institution to meet specific financial needs.
What is a mortgage?
The role of a mortgage is to hold an immovable property as collateral with the lender to get a loan.
What is Stress Test?
It is a method for your lender to understand how you will cope with your repayment obligations in case of a sudden financial setback, such as losing your job or a rate hike up to 2 percent.
What Do You Mean By Collateralized?
Collateralization is the use of an asset to secure a loan.
The lender possesses the legal right to sell the collateral to recover the outstanding if the borrower cannot pay.
What Do I Need To Know About Loans?
A loan is borrowing money from an institution and then returning it with interest. Before taking money, all parties agree on the loan terms. A loan could be collateralized, such as a mortgage, or it can be unsecured, such as a credit card.
1. Secured Loans
Secured loans need to be backed by collateral. Mortgage or car loans are examples of secured loans because the home and the car work as the collateral. If you do not repay the loan, the lender will compensate for the loss by confiscating the collateral.
2. Unsecured Loans
Unsecured loans do not need collateral; therefore, their interest rates are typically higher. Unsecured loans have an inherent risk of not being repaid.
What Do I Need To Know About Mortgage?
While purchasing a new home or any such property, most people will pay for only a part of the property cost known as the down payment for the mortgage.
You need to pay the rest of the amount by taking a mortgage from a lender representing a bank or a financial institution. A mortgage is a loan from banks that enables you to purchase a home or a property.
A mortgage is a legal contract between the lender and the borrower, where the lender defines the mortgage terms clearly and adequately.
If you default on a secured loan, the lender has the legal right to seize your home. It involves making timely payments and keeping the house in good repair.
If you are taking a mortgage,
- The bank/Lender will use the property as security.
- You might need multiple contract renewals to repay the entire outstanding amount.
- You may need to pass the required qualification, called a stress test.
- Bank can levy a penalty in case you breach the contract.
How Is Loan Different From Mortgage?
A mortgage loan is a secured loan in which you must keep a piece of real estate as collateral to get funds. The lender maintains the property records until you pay the loan in full. The home, however, remains in the owner’s hands.
We refer a borrower to a debtor, and we refer a lender as a creditor. A loan is the sum of money borrowed and collected in this transaction: the creditor “loaned out” amount, while the borrower “took out” a loan.
There is inherent security with Mortgages loans as you provide collateral, maybe real estate like land or a home. In return for money paid in installments over time, the borrower owns the land.
To wrap up, now one can easily differentiate between a loan and a mortgage. The above terms and terminologies can help draw a line of distinction between the both and help you in your investing decisions as well.