Personal Loan vs Mortgage: All You Need to Know
When it comes to borrowing money for a home purchase or other financial needs, understanding the differences between a personal loan and a mortgage is essential. While both involve borrowed funds, they serve distinct purposes and come with different terms, interest rates, and repayment structures.
A mortgage is specifically designed for purchasing real estate, providing a longer repayment term and lower interest rate since it is secured by the home. In contrast, a personal loan is usually unsecured, has a shorter repayment term, and may be used for various expenses, including home improvements or debt consolidation.
Keep reading to learn more about personal loans vs. mortgages, including pros and cons of each, uses of both personal loans and mortgages, and when to choose one over the other.
What Is a Personal Loan?
A personal loan is money that you borrow from a bank, online lender, or credit union for a wide range of purposes, including remodeling a home, consolidating credit card debt, paying for cosmetic dentistry, or covering a vacation.
There are both secured and unsecured personal loans. With secured loans, you provide collateral to secure the loan, such as an insurance policy, property, or savings account. If you aren’t able to pay back the loan, the lender may then seize that asset to cover your debt.
Unsecured debt has no collateral backing it. This means that if you default on a personal loan, the lender has nothing to seize to recoup its losses. With unsecured debt, however, you could be subject to higher interest rates because of this lack of collateral.
What Is a Mortgage?
A mortgage is a secured loan used to purchase or refinance real estate, where the property itself serves as collateral. Borrowers repay the loan over a set period, typically 15-30 years, through monthly payments that include principal and interest, along with potential property taxes and insurance.
If the borrower defaults, the lender may foreclose on the property to recover the debt. Mortgages generally come with lower interest rates compared to unsecured loans, making them a common financing option for homebuyers.
Personal Loans vs Mortgages
Below, personal loans are compared to mortgages in more detail.
Personal Loan | Mortgage Loan |
An unsecured loan does not require collateral. | The home you’re buying acts as collateral. |
Loan terms are generally one to seven years. | Loan terms range from 15-30 years. |
Interest rates range from 6.00%-36.00% or more, as of August 2026. | Interest rates average 6.96% for 30-year terms, as of August 2026. |
An unsecured loan generally does not require a down payment. | A mortgage typically requires a down payment, often 20% of the home’s total value. |
A secured personal loan may require collateral, especially if you don’t have great credit. With a mortgage, the home you’re purchasing or refinancing automatically acts as collateral and may determine how much you’re able to borrow based on its value. Unsure what may be used as collateral? Here are a few examples:
Home
Vehicle
Stocks and bonds
Fine jewelry
Fine art
Collectibles
Life insurance
You typically need to repay your personal loan in one to seven years, whereas you have a home mortgage for a much longer period, usually up to 30 years.
Interest rates vary with personal loans, as there are many factors that go into the rate you pay. First, some lenders may approve loans for those with bad credit, though at high interest rates. Short-term loans also tend to have higher interest rates than longer loans, as do loans from alternative lenders (online-based private companies) versus banks.
Can You Use a Personal Loan to Buy a House?
Using a personal loan to buy a house is possible, but it’s not a common or ideal financing option. Personal loans typically have higher interest rates and shorter repayment terms compared to mortgages, making monthly payments significantly higher. Additionally, many mortgage lenders do not allow borrowers to use personal loans for down payments, as doing so increases overall debt and financial risk.
Instead of using a personal loan, exploring other options, such as FHA loans, VA loans, or first-time homebuyer programs, may be more beneficial. These mortgage options often provide lower interest rates, smaller down payment requirements, and longer repayment periods, making homeownership more affordable and financially manageable in the long run.
Note: The average personal loan debt is $11,694 per borrower as of Q2 2026. The maximum personal loan amount available to well-qualified applicants is $250,000.
Can You Use a Personal Loan as a Down Payment on a House?
Many lenders won’t take a personal loan for a mortgage down payment. This is because lenders prefer down payments to come from savings, gifts, or assistance programs, ensuring that borrowers have financial stability and a vested interest in the property.
Taking out a personal loan increases your debt-to-income (DTI) ratio, which could make mortgage approval more difficult since lenders assess your ability to handle additional debt.
Can You Pay Off a Mortgage With a Personal Loan?
While it is technically possible to pay off a mortgage with a personal loan, it is rarely a practical option. Personal loans generally have higher interest rates and shorter repayment terms than mortgages, leading to significantly higher monthly payments. Additionally, many personal loans are unsecured, meaning lenders may limit the amount you’re able to borrow, making it difficult to cover a full mortgage balance.
Before considering this option, it’s important to explore alternatives such as refinancing, getting a mortgage modification, or making extra payments to reduce interest costs and overall debt more efficiently.
When Is a Personal Loan Best?
There are several situations when a personal loan could be a good fit:
Consolidating or refinancing debt
Paying for a wedding
Here are the pros and cons of taking out a personal loan:
Pros of a Personal Loan | Cons of a Personal Loan |
Fast approval and disbursements | Sometimes difficult to qualify for |
May not require collateral if you have good credit | May require collateral if you have bad credit |
May qualify for low rates if you have good credit | May have high interest rates if you have bad credit |
Your credit has a big impact on the personal loans you qualify for. The better your credit, the lower the interest and the more favorable the terms available. If you have bad credit, you may still qualify for financing, but at a higher interest rate.
When Is a Mortgage Best?
A mortgage is better than a personal loan when you’re buying a house or refinancing one. You can’t use a mortgage for other purposes.
Here are the pros and cons of taking out a mortgage.
Pros of a Mortgage | Cons of a Mortgage |
Enables you to buy a home without paying cash | Requires a down payment, usually 20% or more |
Provides long repayment period with lower monthly payments | Allows monthly payments to stretch out for up to 30 years |
Tends to have low interest rates | Puts you at risk foreclosure if you miss payments |
Unlike with personal loans, you could have decades to pay back a mortgage, which means your monthly payment may be lower. But remember, the longer the loan, the greater the overall interest. Mortgage rates, however, tend to be much lower than personal loan rates.
The Takeaway
If you’re looking to borrow money to fund your wedding, a personal loan is ideal. If you want to buy a house, a mortgage is clearly a better solution. You may get a lower interest rate and a longer repayment period.
If you’re looking for a personal loan, consider Lantern by SoFi. You can explore personal loans and see multiple options from different lenders through our network.
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