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Personal loan vs mortgage: what's the difference?

A personal loan and a mortgage serve fundamentally different purposes, and understanding the distinction can save you thousands in interest. A mortgage is secured against property, which means the lender can repossess your home if you fail to repay. Because of this security, mortgage interest rates are significantly lower than personal loan rates, typically 3-5% compared to 5-12% for an unsecured personal loan.

Personal loans are unsecured, meaning no asset backs the debt. This makes them riskier for the lender, which is why they carry higher interest rates. However, they are much more flexible: you can use them for almost anything, from home improvements to consolidating existing debts. They also come with shorter repayment terms, usually 1 to 7 years, which means you pay off the debt faster but with higher monthly payments.

Revolving credit works differently again. Instead of receiving a lump sum, you get access to a credit limit that you can draw from as needed. You only pay interest on the amount you have actually borrowed, making it ideal for irregular expenses. The downside is that interest rates are often variable and can be higher than fixed personal loan rates. Without discipline, revolving credit can also lead to prolonged debt.

A secured loan sits between a mortgage and a personal loan. You offer an asset as collateral, such as a car or savings account, which reduces the lender's risk and often results in a lower interest rate. This can be a good option if you have assets but a less-than-perfect credit score, as the collateral provides the lender with additional confidence.

Before taking out any loan, compare the Annual Percentage Rate (APR) rather than just the headline interest rate. The APR includes all fees and charges, giving you a true picture of the total cost. Also consider whether you can overpay without penalties, as paying off your loan early can save you significant interest over the full term.

Loan types compared