Cash and mortgage loans are standard business financing methods that need to cover today’s expenses in the name of tomorrow’s profits. Usually both financial instruments are assigned to completely different situations, but exceptionally they can also be comparable with themselves products.
Basic differences between the two types of loans
In principle, the only necessary difference between a cash loan and a mortgage loan is to secure the latter with a mortgage. Regarding its entry in the land and mortgage register, it allows the creditor to sell the property if the loan is not repaid. Therefore, the only formal difference is in a very privileged position of the creditor, who does not have to worry about whether the debtor will repay his loan.
In practice, however, this entails a number of consequences, not so much legal, as resulting from market practice. Mortgages are much safer for the borrower, so they can also be cheaper for the borrower. The lender does not have to calculate a high risk of default and therefore may propose a better offer.
The second, very significant difference is the negligible number of concluded mortgage loan agreements for low amounts, not exceeding USD 25,000. Simply, the value of the collateral would repeatedly exceed the liability itself, which one party would not agree to, and the other would have no reason to propose.
Therefore, it can be said that cash (unsecured) loans are usually more expensive than mortgage loans, but they can also be used for smaller amounts.
When can you compare a mortgage loan and a cash loan?
A mortgage and a cash loan are comparable only in a fairly narrow range of situations. It is worth noting that it makes no sense to compare a cash loan with a mortgage, when the financing is to purchase a flat by a natural person. Both loans will usually be alternatives only if:
- Both the borrower and the lender are legal persons or enterprises run as sole proprietorships,
- The borrower owns a property on which he could establish a mortgage,
- The amount borrowed is a minimum of USD 50,000, but not more than 50% of the property value.
- The borrower has sufficient creditworthiness to be granted a cash loan.
Once all these conditions are met, you can compare mortgage and cash loan offers. It is very likely that the former will have a much more favorable APRC. Cash loans are, however, a very broad category, which also includes loans secured in a manner other than a mortgage (pledge, registered pledge, giver (guarantor), security on rights / movables / securities, and even shares in the enterprise itself). A well-secured cash loan can be as cheap as a mortgage.