difference between loan and mortgage
Derek Tallent
By: dtallent
Read in 15 minutes

What Is The Difference Between Loan and Mortgage?

If you are one of the million homeowners in the U.S., you probably are all too familiar with how a mortgage works. But what’s the difference between loan and mortgage?

Many entrepreneurs considering getting a business loan tend to think that these are very similar to their mortgages. While they are both technically loans, the reality is that there are many key differences that make getting and paying off a small business loan a lot different than buying a house and paying a mortgage.

For starters, you may expect to get a similar interest rate in your business loan rate than in your mortgage. But this is nearly impossible! Here we will analyze the difference between conventional loans and mortgage focusing on the following areas: uses, collateral, requirements and other features, so you get a clear picture of both.

At a Glance: Difference between mortgage and loan

What is a loan? A loan is any type of money offered by a financial institution (usually a bank) to a borrower. The borrower thus a debt, and is usually liable to pay interest on that debt until it is repaid in full. There are many types of loans: personal loans, student loans, business loans, mortgages. etc.

What is a mortgage? A mortgage is n specific type of loan from a bank or lender to help you finance the purchase of a home. When you take out a mortgage, you make a promise to repay the money you’ve borrowed, plus an agreed-upon interest rate. The home is used as “collateral.”

Difference between loan and mortgage #1: Uses

Mortgage: When a property owner sells their property, they will usually issue a mortgage loan that the purchasers of the property must pay in order to live on or use the property. If the purchaser does not pay back the loan, the original owner can foreclose the property, taking it back and allowing them to resell it. From the perspective of the homeowner, the mortgage is simply used to allow them to live in or use a piece of property. The use of a mortgage, therefore, is quite limited albeit quite important.

Business Loan: A small business loan is when a lender gives a business owner a sum of money to invest in their business. The uses for a business loan can vary widely. The only use requirement for all business loans is that the funds go towards building the business and not personal use by the business owner. Have in mind that while there’s more flexibility on the use of a business loan, the risk for the lender is also higher, and therefore the interest will be higher than in a mortgage, as we’ll see in the following sections.

Business owners can use business loans to upgrade their equipment/technology, hire more employees, buy bigger office space, increase their marketing reach, and more. There are certain business loans that require the funds to be used in a specific purpose, while other lenders are more flexible and allow the business owners to decide how best to spend the funds. For example, you can use a business loan from Camino Financial to pay off personal loans or credit cards that had been utilized for business purposes.

Difference between loan and conventional mortgage #2: Collateral

Collateral is what is used to protect the lenders. The collateral is what the lender will get from the payer if they fail to pay the loan. A loan with collateral is going to have much lower interest rates, as the collateral gives the lender assurance that they will not suffer a loss if the loan does not get paid back.

Mortgage: The collateral on a mortgage is the property itself. The adjustable rate mortgages are typically lower because the threat of foreclosing on the property is enough to ensure that most homeowners will do everything in their power to pay back their mortgage in a timely manner. Also, have in mind that home properties are assets that keep (or even increase) their value over time.

That makes them excellent collateral: if everything goes wrong and the mortgage holder can’t make the scheduled payments, the bank probably will be able to resell the property at market value. This kind of assurance allows for a lower interest rate. The value of a piece of equipment that you may present as collateral for a business loan, however, is surely going to decrease (the same way it happens, for example, with most cars). That’s one of the reasons interest rates are higher on business loans.

Business Loan: The collateral for business loans again varies depending on the lender and type of loan. Those loans backed by collateral are called secured loans. Typically the collateral for a business loan would be something that can be quickly liquidated to earn money.

In some cases, lenders will require some form of down payment or cash payment deposit as a form of collateral. Generally, the collateral on a business loan is worth substantially less than a property value of a mortgage. This is why the interest rates on business loans are significantly higher than on a mortgage.

The interest paid helps ensure that the lender does not lose as much money if the loan ends up not being paid. Remember not all business loans are secured. Camino Financial doesn’t require that you put up collateral when you apply for a business loan. That way you don’t risk your personal or business assets.

 Difference between loan and mortgage #3: Requirements

Mortgage: The first requirement of a mortgage is to make a down payment on the property, which can range anywhere from 10-20%. You also will likely have to get private mortgage insurance to cover the payments on your mortgage. Most mortgages require a credit score of at least 620-640, as well as a steady source of income (lenders will likely check the homeowner’s bank statements and employment history). Lastly, lenders will require the homeowner to have a debt to income ratio of 50% or less.

Business Loan: The requirements for a business loan will vary depending on the lender and type of loan. While you don’t need to make a down payment or to get insurance on your business loan, your credit score plays an important role here, since it serves the lender as the strongest validation that you will repay the loan on time. Other common factors that your lender will consider are:

  • The loan amount that you have requested
  • The purpose you have for the loan
  • The number of years you have been in business
  • The type of industry you operate in
  • The annual sales of your company
  • Your financial statements.
  • The amount outstanding on your existing loans
  • The cash flows of your business

Access here a complete list of the most common business loan requirements.

Apply For A Business Loan!

As you can see, these requirements have nothing to do with those to apply for a mortgage. The list above seems like a long one, but have in mind that some lenders are more flexible in their requirements. At Camino Financial we don’t base our loan decision on all the factors mentioned above. Mainly, we take into consideration the personal credit of the business owner and global cash flows.

Difference between loan and mortgage #4: Other features

Below is a chart showing some other typical features of a mortgage and a business loan (working capital loan):

                                                                                                      Mortgage                                 Business Loan




 It’s typically quite long, with payments being made for anywhere from 15-30 years.  It can vary but is typically much shorter than a mortgage. It can range from 6 months to 7 years.
Annual Percentage Rates Currently, for a 30-year mortgage, it generally ranges between  3.63% to 7.84%. Some banks have adjustable rates or fixed rate mortgages. Working capital business loan rates vary from 7.75% to 40.0%. We caution against loans with higher rates. Compare here the different interest rates by lender and type of loan.
Closing Costs Buyers will typically pay 2-5% of the purchasing price as a closing cost (for a $200,000 house that would be $10,000). A lot of business loans will come with no specific closing costs or fees. In general, a loan between $150,000 to $700,000 will have a 3-7% closing cost.
Monthly Payment Inclusions Monthly mortgage payment: They include principal and the interest, and the buyer has the option to include here the property taxes and homeowners insurance. Typically it only includes the principal payments and interest payments.


Other Loan vs Mortgage-Related FAQs 

  • Are a mortgage and a loan the same thing? A mortgage is a specific type of loan, used to purchase a home. The home itself acts as collateral. If the borrower fails to pay back the money borrowed, the lender can seize the home. Besides mortgaged, there are several other types of loans, secured (requiring collateral) and unsecured (without the need to put up collateral).
  • What is the difference between a mortgage and a secured loan? A mortgage is a type of secured loan. In this case, the property or real estate is used as collateral. The borrower enters into an agreement with the lender (usually a bank) wherein the borrower receives cash upfront then makes payments over a set time span until he pays back the lender in full, plus interests. For other types of secured loans, other assets (a vehicle, business equipment, etc.) are used as collateral.
  • Is a loan better than a mortgage? It all depends on the use you intend for the borrowed funds. If you are going to purchase a home or real state, a mortgage will be the best option. Both of them will consider your credit report.

If you are looking for a loan, apply easily with Camino Financial.

Apply now!

We hope that you now have a better idea of the difference between loan and mortgage and why you cannot approach a business loan in the same way as a mortgage. A business loan may seem very difficult to understand or to get.

That’s why at Camino Financial we strive to offer you a clear, simple and fast loan process. We provide you with guidance and resources to help you make an informed decision, like our business loan calculator, which you can use to see all you loan cost and payments at a glance. Use it to determine the loan amount and monthly payments you feel comfortable with.

These are some of the features of our small business loans:

  • Amounts: from $5,000 to $400,000, to adapt to any of your business needs
  • Annual Interest Rate: starting as low as 12%
  • Terms: 24-60 months
  • Payment frequency: monthly
  • Uses: funds from our loans can be used to pay off personal loans or credit cards that had been utilized for business purposes. You can even use the loan to purchase a second business.

As you have seen, we are more flexible than traditional lenders like banks since we mainly take into consideration your personal credit and the global cash flows of your business. These are our requirements:

  • You should generate sales of $30,000 annually or $2,500 a month
  • While it’s recommendable that you’ve operated for 2 years, we consider businesses with just 9 months in operations

Other benefits:

  • Quick and easy online process: you can receive your funds within 4-10 business days
  • You don’t have to provide us with collateral
  • Applicants with only an Individual Taxpayer Identification Number (ITIN) can qualify
  • The only fee we apply is the closing fee
  • No prepayment penalty if you decide to pay off your debt at any time

Finally, these are the only documents we require from you:

  • Your online application
  • Electronic authorization to download the last 6 months of banking activity
  • Last year of tax returns with reported business income
  • Proof of business registration

All you have to do to start is submitting your loan application. It will take only a few minutes, and it won’t affect your credit score. You will receive an instant response informing you if you have been prequalified. Subsequently, one of our representatives will get in touch with you and guide you through the borrowing process. Remember you could get the funds to grow your business in just a few days!

Apply For A Business Loan!


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