What is the difference between a personal loan and a home loan?
A personal loan is a consumer loan. It can take two main forms.
It allows you to invest in personal projects such as the purchase of a new car, furniture or computer, the renovation of your house or even the organisation of your wedding. This type of personal loan is referred to as a secured personal loan, a personal amortizing loan used for a specific project. You have to supply proof of purchase or use of the loan (estimation of costs for renovation works, for example).
It allows you to finance unexpected expenses or to meet your cash requirements. This type of personal loan is referred to as an unsecured personal loan, a personal non-amortizing loan not used for a specific project. You can use the borrowed amount as you wish. You don’t have to explain the use of the loan.
Personal rate: fixed interest rate, limited term and amount
A personal loan has the following characteristics:
It is a fixed interest rate loan (Annual Percentage Rate of Charge or APRC) and the monthly payments are equal
The maximum amount that can be borrowed is EUR 75,000
The loan terms vary from 6 to 60 months
The term, amount and monthly payments are determined in advance and not reviewable during the term of your loan (except prepayments)
Home loan: only used for acquiring a home
Home loans differ substantially from personal loan. Firstly by its purpose:
- A home loan is exclusively used for buying an existing house or apartment, building, renovating and converting a dwelling and purchasing a building plot.
Secondly by the way in which it operates:
Three types of interest rate are possible: fixed rate, reviewable fixed rate and variable rate. The monthly payments will change from one year to another for a variable rate, can be revised after 3, 5 or 10 years for a reviewable fixed rate and remain fixed for a fixed rate
The amount borrowed can be greater than EUR 75,000
The home loan term can be longer: generally from 5 to 30 years
The security required by the bank for a home loan is more substantial: your financial solvency is not enough, you have to get a mortgage, a debt instrument secured by the collateral of specified real estate property that you are obliged to pay back, and your bank can request additional guarantees like a debt balance insurance that covers the outstanding balance of the loan in the event of your death
A personal loan for works or a home loan?
Though the differences between personal loans and home loans may be clear to you now, it is still not always obvious. For instance, what do you do if you want to borrow money from your bank for renovation works? Do you have to take out a personal loan for works or a home loan? It depends on the amount to be borrowed and the term of your loan: if you want to borrow more than EUR 75,000 and/or get a loan term longer than 5 years, you have to take out a home loan. Don’t forget that home loan rates are commonly more attractive than personal loan rates but, in this case, you have to pay additional costs like mortgage costs.
Often you hear people say: “Anyway, until I have paid off my home loan it’s the bank who owns my house”. But is it true?
It is always the same question that every one of us is asking before signing a home loan with his bank. To gain a more objective overview, let’s analyse them one by one with their respective advantages and disadvantages.
The rate remains fixed for a pre-defined period and, at the end of the period, is subject to a revision. The pre-defined period can vary from one bank to another but is generally 3, 5 or 10 years.