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Personal Loan vs. Mortgage: All You Need to Know

Personal Loan vs. Mortgage: All You Need to Know
Susan Guillory
Susan GuilloryUpdated March 14, 2025
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
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 offer access to funds, they serve distinct purposes and come with different terms, interest rates, and repayment structures. A mortgage is specifically designed for purchasing real estate, offering longer repayment terms and lower interest rates since it is secured by the home. In contrast, a personal loan is usually unsecured, has shorter repayment terms, and can be used for various expenses, including home improvements or debt consolidation.Keep reading to learn more on 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 can 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 to 30 years, through monthly payments that include principal and interest, along with potential property taxes and insurance. If the borrower defaults, the lender can foreclose on the property to recover the debt. Mortgages generally offer lower interest rates compared to unsecured loans, making them the most common financing option for homebuyers.

Personal Loans vs. Mortgages

Let’s compare a personal loan to a mortgage in more detail.
Personal LoanMortgage Loan
An unsecured loan does not require collateralThe home you’re buying acts as collateral
Loan terms are generally two to seven yearsLoan terms range from 15 to 30 years
Interest rates range from 6% to 30% or more as of March 2025Interest rates average 6.63% for 30-year terms as of March 2025
Does not require down paymentTypically requires a 20% down payment 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 will determine how much you can borrow based on its value. Unsure what can be used as collateral? Here are a few examples:
  • Home
  • Vehicle
  • Stocks and bonds
  • Fine jewelry
  • Fine art
  • Collectibles
  • Life insurance 
You’ll need to repay your personal loan typically in two 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 will 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, most mortgage lenders do not allow borrowers to use personal loans for down payments, as it increases overall debt and financial risk.Instead of using a personal loan, exploring other options like 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 $11,652 per borrower as of Q3 2024. The maximum personal loan amount available to the most qualified applicants is $100,000, coming with sizable interest.

Can You Use a Personal Loan as a Down Payment on a House?

Most 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 can 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, most personal loans are unsecured, meaning lenders may limit the amount you can borrow, making it difficult to cover a full mortgage balance. Before considering this option, it's important to explore alternatives such as refinancing, mortgage modification, or making extra payments to reduce interest costs and overall debt more efficiently.Recommended: How Personal Loans Can Affect Mortgages

When Is a Personal Loan Best?

There are several situations when a personal loan could be a good fit:Here are the pros and cons of taking out a personal loan:
Pros of a Personal LoanCons of a Personal Loan
Fast approval and disbursementsSome loans may be difficult to qualify for
May not require collateral if you have good creditMay require collateral if you have bad credit
If you have good credit, you may qualify for low ratesInterest will likely be high 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 offered. If you have bad credit, you may still qualify for financing, but at a higher interest rate.Recommended: How Much Can You Borrow With a Personal Loan?

When Is a Mortgage Best?

A mortgage is best 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 MortgageCons of a Mortgage
Enables you to buy a home without paying cashRequires a down payment, usually 20% or more
Long repayment period means lower monthly paymentsMonthly payments will stretch out for up to 30 years
Tend to have low interest ratesIf you miss payments, you risk foreclosure
Unlike with personal loans, you could have decades to pay back a mortgage, which means your monthly payment will 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’ll likely 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 offers from different lenders through our network.  

Frequently Asked Questions

Can you use a personal loan for a mortgage down payment?
Will having a mortgage affect getting a personal loan?
Can you buy a house with a personal loan?
Can you roll a personal loan into a mortgage?
Photo credit: iStock/HAKINMHAN
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About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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