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A personal loan is an unsecured loan used for various purposes, while a mortgage is a secured loan specifically used to purchase or refinance real estate.
Deciding between a personal loan vs. mortgage ultimately boils down to what you need the money for. While a personal loan can be used for any purpose, such as consolidating debt or paying off unexpected expenses, they often come with high interest rates. A mortgage, on the other hand, is a loan specifically for buying property and uses the home as collateral.
There are more differences between the two financial products and depending on your situation you might find yourself debating which one’s the better option. We’ll dive deeper into the differences between personal loans and mortgages, provide the pros and cons of each and give an expert mortgage lender’s recommendations on how to decide between the two.
What is a Personal Loan?
A personal loan is a type of loan that you can borrow from a bank, credit union or online lender for any purpose, such as debt consolidation, paying for medical expenses, funding home improvements or covering unexpected financial emergencies.
Personal loans are typically unsecured, meaning they do not require collateral like a car or house to secure the loan. Instead, lenders assess the borrower’s creditworthiness based on their credit score, income, employment history and debt-to-income ratio. The interest rates on personal loans can vary depending on the borrower’s creditworthiness and the lender’s terms.
“The rate is normally higher [than a mortgage] and can go up to 36%,” says Pahm Foxley, vice president of Mortgage Lending at Wasatch Peaks Credit Union. “In comparison to a mortgage loan, the approval turnaround time is quicker for a personal loan.”
Personal loans are usually repaid in fixed monthly installments over a set period of time, which can range from a few months to several years. The loan terms, including interest rates, repayment period and loan amount, are agreed upon between the lender and the borrower before the loan is disbursed.
Pros
- Flexibility: You can use a personal loan for any purpose.
- Easy to get: Personal loans tend to have flexible requirements and some lenders specialize in working with borrowers with less-than-perfect credit.
- Fast funding: Some lenders offer next-day loan funding so if you’re experiencing an emergency, you can get your funds sooner rather than later.
Cons
- Higher interest rates: The rates vary depending on the lender and your credit score but personal loans tend to have higher rates than other types of loans.
- Short repayment terms: You typically only have a few years to pay off a personal loan so the payments can be steep.
What is a Mortgage?
A mortgage is a loan used to buy property. Also referred to as mortgage loans or home loans, these loans are secured by the property you buy. In other words, if you stop paying your mortgage, your lender can foreclose on your home and sell it to pay off your mortgage balance.
There are two main types of home loans: government-backed mortgages and conventional mortgages. Examples of government-backed mortgages include Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) and Veterans Affairs (VA) loans.
There are two types of conventional mortgages:
- Conforming loans: Conforming loans follow the requirements of Freddie Mac and Fannie Mae, government-sponsored enterprises that buy mortgages. These loans have limits.
- Non-conforming loans: These loans are much more flexible. They don’t have to meet specific requirements so they vary by lender. If you’re considering a non-conforming loan, look closely at the terms and make sure you’re comfortable with them.
Mortgages can also have Private Mortgage Insurance or PMI. This insurance protects the lender if it forecloses on your mortgage. In most cases, you must pay for PMI if you make a down payment of less than 20% of the total mortgage. You may also have to pay PMI if you refinance into a new mortgage and have less than 20% equity in your home.
Pros
- Low interest rates: Mortgages have low interest rates compared to personal loans, credit cards and other types of loans.
- Long repayment terms: Longer repayment terms mean you have lower payments each month.
- Flexible credit requirements: While you may have to pay a higher interest rate, you can qualify for a mortgage with a 620 credit score (sometimes even lower).
Cons
- Lengthy loan process: It often takes months or longer to complete the mortgage process.
- May have to pay PMI: Depending on your down payment, you may have to pay PMI, which makes your monthly payments higher. The good news is that you can get rid of PMI once you’ve paid your mortgage down to 80% of the balance or more.
Personal Loan vs. Mortgage
| Personal Loan | Mortgage | |
| Loan limit | Up to $100,000 | Up to $806,500 (for conforming loans on single-family properties) |
| Average interest rates | Around 12.36%, but can go up to 36% in some cases | Around 6.9% |
| Terms | Two to seven years | Up to 30 years |
| Fees | Origination fee equal to 1-5% of total loan amount, late fees | Closing costs, appraisal fee, origination fees, prepayment penalties, late fees |
| Secured? | Typically no | Yes |
How to Choose Between a Personal Loan and a Mortgage
While personal loans and mortgages allow you to borrow money, each has a different purpose and requirements.
“A personal loan is an unsecured loan and so they are a higher risk to the lender,” Foxley says. “They can be a great option if you only need a small loan amount.” The tradeoff, however, is a higher interest rate, though you’re likely to have cash in hand much quicker than a mortgage.
“For a personal loan you are not pledging any assets and the funds can be used for any purpose,” Foxley adds.
A mortgage is meant for people looking to buy property and is secured by the home. They have lower interest rates, though it may take several weeks before you’re approved for one.
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with Pahm Foxley, vice president of Mortgage Lending at Wasatch Peaks Credit Union.
Frequently Asked Questions
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It depends. A personal loan has a much quicker turnaround time than a mortgage and can be used for any purpose but it comes with a much higher interest rate and a shorter repayment period.
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The monthly payments on a $5,000 personal loan would depend on its term and interest rate. A loan of that size with a 12% interest rate and a seven-year term would cost around $88 per month.
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The primary disadvantages of a personal loan are that they have high interest rates and a shorter repayment period than a mortgage. On the bright side, the funds can be used for any purpose and are approved much quicker than a home loan.
Sources
- Pahm Foxley, vice president of Mortgage Lending at Wasatch Peaks Credit Union
- “FHFA Announces Conforming Loan Limit Values for 2025,” Federal Housing Finance Agency, https://www.fhfa.gov/news/news-release/fhfa-announces-conforming-loan-limit-values-for-2025
