Nowadays, having some extra income has become a necessity due to higher bills and increasing daily expenses. For this reason, those who struggle to make ends meet turn to banks or finance companies to obtain a loan, mortgage or financing. Finding your way between these solutions, however, is not easy because each has its own rules, costs and timescales. Understanding the differences well therefore allows you to make more informed choices and avoid financial commitments that are difficult to sustain over time.
What is a mortgage and what is it really for
The mortgage is a long-term loan, used mainly to purchase or renovate a property. More precisely, it is an agreement between the bank that lends a large sum and the customer who receives it. The latter then undertakes to repay it in installments, which include both the principal and interest.
To guarantee the loan, a mortgage is then registered on the property which protects the bank in the event of non-payment.
From a legal point of view, it is a contract governed by article number 1813 of the Civil Code in which two subjects are involved: the lender who grants the money and the borrower who receives it and undertakes to return it.
What is a loan
The loan is a form of credit that is used to cover immediate economic needs and for a smaller amount than a mortgage. It can be requested from a bank or finance company and involves the disbursement of a sum in a single payment, which is then repaid in monthly installments.
Unlike a mortgage, it is not tied to a specific purpose: whoever receives it can in fact use it freely without having to specify the expenses and this is precisely why it is defined as “not finalizedIn fact, it can be used for personal expenses, purchases or other projects.
What is a loan
The term financing generally refers to any form of credit granted by a credit institution or finance company to support an investment or expense.
It includes different solutions such as leasing, mortgage, loan or salary-backed loan, each of which has different characteristics but the same objective, that of providing liquidity to make an expense.
Unlike a personal loan, however, it is often linked to a specific purchase and is activated directly at the point of sale or through an agreement with a finance company.
A typical example is the purchase of an appliance that can be paid for in small monthly installments rather than in a single payment.
The differences between mortgage, loan and financing
The main differences between mortgage, loan and financing mainly concern the amount, duration, required guarantees and purposes.
The most demanding form of credit is certainly the mortgage as it is long-term and is particularly requested to purchase or renovate a home. It involves large amounts, even hundreds of thousands of euros, and a duration of up to 30 years. It also requires a mortgage on the property as collateral.
The most flexible and fastest solution to obtain is certainly a loan. The amounts, in fact, are smaller: they range from thousands to tens of thousands of euros while the duration is medium-short, usually from 1 to 10 years. Furthermore, real guarantees are not always required as proof of income may be sufficient.
Finally, financing has variable characteristics. The duration and amount depend on the asset or project financed as well as the economic conditions applied.
Are the interest rates the same?
The interest rate is a fundamental element because it determines the overall cost of the credit.
For the mortgage you can choose between fixed, which keeps the installment unchanged for the entire duration, and variable, which instead follows the trend of market parameters such as Euribor: it can therefore increase and decrease over the years, affecting the amount of the installments.
For personal loans, however, the rate is almost always fixed and established upon signing the contract, so the amount of the installments can be known from the beginning until the end.
Finally, in the case of financing, the rate varies based on the type of product: it can be fixed, variable or even promotional, as in the case of zero-rate offers linked to the purchase of goods.
What to evaluate before choosing a mortgage, a loan and a loan
Before choosing between a mortgage, loan and financing, it is essential to carefully evaluate the sustainability of the monthly payment. The latter, in fact, should never exceed one third of the available monthly income, so as to be able to maintain a balance in expenses and avoid difficult situations over time. It is also important:
- carefully analyze your economic situation;
- understand what goal you want to achieve;
- compare the different offers because each solution has different conditions in terms of costs, duration and amounts;
- check the flexibility of the contract (for example, check the possibility of changing the amount of the installments or suspending them);
- consider the possible presence of additional costs as, in addition to interest, there may be investigation costs, commissions, compulsory or optional insurance and penalties;
- evaluate the final cost and not just the monthly installment to have a clearer vision of what the real financial commitment will be.
The speed of delivery is also important. In fact, if you need to have immediate money, a personal loan or financing may be more suitable than a mortgage which requires longer approval times.
Finally, it is useful to always read the early termination conditions carefully.
What documents are needed?
The documentation required for the mortgage is more extensive because the amounts requested are higher. The main documents to be presented are the identity card or another document that certifies the valid identity, the tax code and those relating to income such as Cu, pay slip or tax return. You also need documentation relating to the property such as the compromise or the cadastral survey.
For a personal loan, the procedure is much simpler as usually all you need is:
- the identity document;
- the tax code;
- proof of income.
Pensioners and self-employed workers must submit their pension slip or tax return while employees submit their pay slips.
Finally, for financing, the documentation varies depending on the type of purchase. In any case, the basic documents to be presented are the same as for the loan, i.e. the identity document, the tax code and demonstrable income. In some particular situations, however, the bank may also request account statements or additional documents.
