When you rent an apartment or home, you typically need to provide a security deposit, often equal to one month’s rent, or the first and last month’s rent. This is cash the landlord sets aside to cover the cost of any damage you might do to the property or recoup any unpaid rent. You get it back (assuming you keep up your end of the rental agreement) when you move out. In the meantime, though, you have to come up with the cash.
If you don’t have the potentially thousands of dollars you need to secure a rental just sitting in the bank, you might consider taking out a security deposit loan. This is a type of personal loan that can give you quick access to the funds needed to secure a rental. However, these loans come with costs, as well as some other drawbacks. Here are key things to know about security deposit loans.
Understanding Security Deposit Loans
Definition and Purpose
A security deposit loan is a type of personal loan specifically structured to help renters cover the cost of their security deposit when moving into a new rental property. However, even if a personal loan isn’t specifically marketed as a “security deposit loan,” you can likely use it for this purpose. Unlike a mortgage or car loan, personal loans aren’t tied to a specific use. They’re a form of flexible funding that you can use for a wide variety of expenses, including covering the security deposit on a rental, or even to purchase new furniture for your new place.
How Security Deposit Loans Work
Personal loans for apartment deposits are available from banks, credit unions, and online lenders. They are a type of installment loan: You receive the full amount of the loan upfront, then repay it (plus interest) in monthly installments over the term of the loan.Security deposit loans typically have fixed interest rates, which means that the interest rate — and your monthly payment amount — will remain the same throughout the life of the loan.
Most personal loans are unsecured, so you don’t need to provide an asset of value (called collateral) to back up the loan. There are some secured personal loans, however, which do require collateral. If you opt for a secured loan, the lender can seize your collateral if you default on your payments. Since this lowers the lender’s risk, secured loans typically have lower interest rates and can be easier to qualify for than unsecured loans.
Eligibility and Requirements for Security Deposit Loans
If you are wondering if you can get a loan for a security deposit, here’s a look at common criteria for approval.
Credit Check and Income Verification
When you apply for a security deposit loan, the lender will typically perform a credit check to assess your past borrowing behavior (a.k.a., creditworthiness). You can often prequalify for a security deposit loan, which involves a soft credit pull and won’t impact your credit. When you officially apply, however, the lender will do a hard credit check, which can temporarily lower your score by a few points.
A positive credit history and solid credit score increase your chances of approval and may result in more favorable loan terms, such as a lower interest rate. While there’s no universal minimum credit score for a personal loan, many lenders like to see a credit score of at least 580.
Lenders also require proof of income to ensure that you have the financial means to repay the loan. This can include recent pay stubs, tax returns, and/or bank statements. Some lenders may also consider the applicant’s employment history and stability as part of the approval process.
Repayment Term and Interest Rate
Repayment terms for security deposit loans can vary widely depending on the lender and loan amount, but commonly range from six months to three years. The rate you’ll pay will depend on the lender, the loan amount, and your creditworthiness as a borrower. The average personal loan interest rate as of July 2024 is 12.36%.If you have good or excellent credit, you may get a lower interest rate; if you have poor credit, the rate could be higher.
Additional Fees and Costs
Security deposit loans may also come with fees. Some lenders charge an origination fee to cover the cost of processing the loan. These are often between 1% and 5% of the loan amount but can be as high as 10%.
Other fees you may see tacked onto a security deposit loan include late fees (which you’ll only pay if you don’t make a payment on time) and a prepayment penalty (a fee for paying off your loan early).
Not all lenders charge fees, and in some cases you may be able to negotiate with your lender for lower fees or to have them waived entirely.
Pros and Cons of Security Deposit Loans
As with any form of financing, apartment deposit loans have both benefits and drawbacks. It’s important to understand both so you can make an informed decision.
Advantages of Security Deposit Loans
• Can secure the rental: If you don’t have sufficient savings to cover your security deposit, a security deposit loan can make the difference between getting — and not getting — the rental apartment or home you want.
• Fast access to cash: Many personal loan lenders offer funding within two to five business days after approval. Some even fund the loan the same day you’re approved.
• Can help you build credit: Making on-time payments on a security deposit loan can help you build a positive credit history. Adding an installment loan to your credit mix can also have a positive impact on your credit.
• Spreads out costs: By repaying the loan over time, renters can spread out the cost of the security deposit, making it easier to manage.
• Don’t have to resort to other forms of financing: You won’t need to rely on more expensive forms of financing, such as a payday loan or a credit card cash advance.
Drawbacks and Risks
• Increases your costs: Taking out a personal loan to cover your security deposit ultimately makes that deposit more expensive. Even if you get the full amount back from the landlord when you move out, you won’t recoup the interest and fees you paid for the loan.
• Added financial responsibility: Once you take out a loan, you’ll be on the hook for keeping up with loan payments. That’s another bill to pay – on top of your new rent and other monthly costs.
• It could potentially hurt your credit. Missing payments or defaulting on a security deposit loan can negatively impact your credit, making it more difficult to secure loans or credit cards with low rates in the future.
• It may be a sign that you’re not ready to move. Going into debt to pay for a security deposit may indicate that you aren’t ready for financial independence. You might consider more affordable rental properties, partnering up with roommates, or living with family until you can save more.
• Eligibility requirements: Not all renters will qualify for a security deposit loan, especially those with poor credit or an unstable income.
Alternatives to Consider
If taking out a loan for an apartment deposit doesn’t make financial sense for you, here are some other options to consider.
• Saving up: Planning and saving for a security deposit in advance can help avoid the need for a loan. Consider setting up an automatic transfer from checking to saving for a set amount each month to build your moving fund. To fast-track your savings, you may want to cut back on expenses and/or look for ways to bring in more income.
• Applying for a rental with a smaller security deposit: Some landlords only request one month’s rent (rather than first and last), which could make it easier to cover the deposit without taking on debt.
• Negotiating with the landlord: Some landlords may be willing to negotiate the security deposit amount or offer a payment plan, allowing renters to pay the deposit in installments rather than a lump sum.
• Borrowing from family or friends: Borrowing from trusted family members or friends can be a cost-effective alternative, often without the interest and fees associated with loans.
• Getting a roommate: This will allow you to split the security deposit, as well as other moving costs, not to mention the rent moving forward.
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The Takeaway
Taking out a security deposit loan to cover the deposit on a new rental can be a relatively easy way to come up with the money you need to get the keys and move in. However, you’ll need to weigh the pros and cons of taking on debt.
It might be better to assess whether you’re financially ready to make the move or consider other ways to raise the cash. If you decide that using a personal loan for a security deposit makes sense for your situation, you’ll want to shop around for the best possible deal and be sure to manage the loan responsibly.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
FAQ
Are security deposit loans only for apartments?
No, security deposit loans are not limited to apartments. They can generally be used for any rental property that requires a security deposit, including single-family homes, condos, and townhouses. The primary purpose of these loans is to help renters cover the upfront cost of the security deposit, regardless of the type of rental property. However, you’ll want to check with the lender to ensure that the loan terms align with your specific rental situation.
What happens if I move out before repaying the loan?
If you move out before repaying a security deposit loan, you’re still financially responsible for making the agreed-upon payments until the loan is paid in full. The loan is a separate financial obligation from your rental agreement, meaning that moving out does not clear your debt.
Can I use a security deposit loan for a home purchase?
No, security deposit loans (which are a type of personal loan) are specifically designed for rental properties and are not meant to be used for a down payment on a home. In fact, many mortgage lenders forbid you to use a personal loan to cover a down payment for a home, since this involves taking on two debts at once.
Photo credit: iStock/Happy Kikky
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