If you’re planning to purchase a property, knowing about the difference between mortgage and collateral is extremely important. You must’ve heard both of these words in the same sentences often. They’re correlated in terms of purchasing a property but are quite different from each other in terms of meaning and purpose.
When you get a property, you can get it on a mortgage, where the property itself serves as collateral. Know how mortgage and collateral work and how they differ.
An Overview of Mortgage
A mortgage refers to a type of loan that you get to purchase homes or other types of real estate. It works in the following way:
- A mortgage loan allows you to purchase real estate without paying the full price of the property in a lump sum.
- You need to repay the loan amount as well as the interest across a specific number of years until you fully own the property.
- Most mortgages are amortised, which means your regular payment remains constant while the proportions of principal and interest vary with each payment.
- You can get a mortgage on your house for an extended duration, which typically ranges up to 30 years.
- In a mortgage, the property for which you are getting the loan serves as collateral for the loan itself.
Also Read: Complete Guide on Mortgage Loan
An Overview of Collateral
Collateral is an asset that you can pledge as security to get a loan. Here’s how it works:
- Loans for which you provide collateral are secured loans.
- In case you don’t repay the borrowed amount, the lender can seize the asset and recover the amount.
- Typically, the value of the collateral is enough to cover the lender’s loss in case you fail to repay the amount.
- You can pledge various assets as collateral, such as property, vehicles, investments, gold, etc.
- In terms of a mortgage, the property for which you borrow the funds serves as the collateral.
Difference Between Mortgage and Collateral
As mentioned above, you’ll typically often hear the words ‘collateral’ and ‘mortgage’ together, especially when getting a property. Here is the primary difference between the two:
- You can use a mortgage to finance the purchase of a home or any other property and repay the dues in instalments over an extended period.
- On the contrary, collateral is an asset that you need to pledge when applying for a secured loan.
Also Read: Secured Loans Vs Unsecured Loans
How Mortgage – Collateral Works
In simple terms, the mortgage represents the debt and the collateral is the security against that debt. Here are some points to note when discussing the features of collateral vs mortgage:
- When getting a mortgage, you need to pledge collateral, which is usually the property you’re getting the loan for.
- You need to repay the borrowed amount in instalments, including the principal amount and the interest amount over a predetermined duration
- If you repay the mortgage of the property successfully within the pre-decided tenure, you get full ownership of the estate.
- Whereas, if you fail to repay the loan within the repayment period, the lender can legally seize your property to recover the amount.
With this information in hand, you may have better clarity about collateral vs mortgage. If you need funds for purchasing property or another requirement, apply for Personal Loan from Fibe. You can benefit from an instant fund disbursal and address your needs easily.
Since we use an alternate scoring mechanism to check your creditworthiness, you can get funds affordably even if you have a lower CIBIL score. Install the Fibe App to get the funds, or apply via the website today.
FAQs on the Difference Between Mortgage and Collateral
Are all mortgages collateral-based?
Yes, almost all mortgages are supported with collateral. The property for which you’re getting the loan is the collateral in most cases. This is one of the most significant features you need to know when comparing collateral vs mortgage.
Does the collateral act as a security for the mortgage?
Yes. A collateral is the security that you need to pledge when you take a secured loan. In the case of a mortgage, the property for which you’re borrowing funds acts as collateral.
What is the difference between a pledge, collateral and a mortgage?
If you’re seeking a loan to finance the purchase of your home, you must be hearing these words often. Here’s how they differ:
- A pledge is a legal arrangement where you offer collateral to the lender as security to get a loan.
- Collateral is an asset that you pledge to a lender as security to avail of a loan.
- A mortgage is a specific type of loan that you opt for to purchase real estate, wherein the property you pledge serves as collateral
