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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 August 29, 2022
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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.
If you are in the market for a house, chances are you’re in the world of mortgages. If you need to borrow a lump sum of money for other reasons, you’re probably contemplating a personal loan. They may seem quite different, but there are similarities between these two financial products. Digging deeper into the pros and cons of each should help guide you when next you consider either a mortgage or a personal loan.

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, and 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 a boat. 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 personal loan payments, the lender has nothing to seize to recoup its losses. With unsecured debt, however, you could be subject to higher interest rates on personal loans because of this lack of collateral. 

What Is a Mortgage?

It’s important to grasp what mortgages are. They have a narrow use: you can only purchase or refinance a home with a mortgage. The home acts as collateral for the loan. Generally, you can borrow much more money with a mortgage than with a personal loan.Recommended: Ultimate Guide to Buying a Tiny Home

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
A loan terms of 2-5 years generallyA loan term of 0-30 years
5.73% to 35.99% interest rate, depending on credit ratingRanging between 4.20% and 5.65% interest rate, July 2022
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 less than five years (and there are  short-term loans that have repayment periods of under a year), whereas you have a home mortgage for a much longer period, sometimes 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 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?

Given how much you likely will need to borrow, and how short the repayment period can be for a personal loan, buying a house with a personal loan instead of a mortgage is risky. If you can’t pay back the full amount before the loan deadline (in five years or less, usually), you risk defaulting on the loan.There are a few scenarios in which it might work. If you know you will have the full amount available to pay off the loan you use to buy the home (maybe you’re waiting for a payout from insurance or an inheritance), it’s possible to use a personal loan to buy a home and repay it by the time it’s due.Note: The average amount of a personal loan is $6,000. 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?

This is very tricky, and up to the lender. Many of them won’t take a personal loan for a mortgage down payment. The reasoning is that you aren’t able to demonstrate that you are financially well-off enough to pay the debt because you’re taking out two loans (one personal and one mortgage) to buy your house.

Can You Pay Off a Mortgage With a Personal Loan?

The interest rate for a mortgage loan vs. a personal loan is usually lower. Taking out a personal loan with higher interest to pay off a mortgage with a lower rate doesn’t make sense.If, for some reason, you were able to get a personal loan with a rate lower than that of your mortgage and you were able to repay the loan within the repayment period, you might consider this option. But this is not a common situation.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:
  • Consolidating or refinancing debt
  • Remodeling a home
  • Paying for a wedding
Here are the pros and cons of taking out a personal loan:
Pros of a Personal LoanCons of a Personal Loan
Easy access to cash without long waitSome 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.

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 eventual interest.Mortgage rates tend to be much lower than personal loan rates.

Unmortgageable Homes

Some homes don’t qualify for a mortgage. These are rare, but in some instances, a lender may turn you down for a mortgage. It’s not because you didn’t qualify, but because the home didn’t qualify.An example would be if the home isn’t up to code when an inspector comes around, perhaps because it isn’t complete or lacks wiring that meets safety regulations.

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.You can explore personal loans and see multiple offers from different lenders through Lantern by SoFi.  

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

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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