Security Deposit Loans: How They Work

When you rent a new apartment or home, a security deposit is often required to ensure you’ll return the property to the owner or landlord in the condition it was rented. Security deposits are common, but not everyone can afford them. That’s when a security deposit loan may come in handy.

Often equal to the first month’s rent—or sometimes first and last months’ rent—a security deposit helps guarantee a tenant will pay rent and care for an apartment. If a tenant fails to pay rent or damages, the landlord keeps all or part of the security deposit as compensation.

Read on to learn more about your security deposit loan options and determine whether they’re the right choice for you.

Can you use a personal loan to cover a security deposit?

The two main types of personal loans are secured and unsecured. An unsecured loan does not require the borrower to put up collateral (private property, such as a car) for approval. On the other hand, a secured loan is secured by a specific asset in case the borrower defaults.

Generally, borrowers must have good credit to be approved for an unsecured personal loan. Unsecured loans often have higher interest rates than secured personal loans.

You can use a personal loan to cover a security deposit, but it’s essential to understand how these loans work before you explore this option.

Banks, credit unions, and online lenders offer personal loans and approve applicants based on their credit scores and financial history. Lenders tend to offer the lowest interest rates and best terms to applicants who:

• Have high credit scores
• Opt for a shorter repayment period
• Have a history of paying their bills on time

If you don’t have excellent credit, you may be able to take out a secured loan instead. Since these are secured by the collateral you attach to the loan, they often come with lower rates and reduced credit score requirements. Once the lender approves the loan, it disburses the funds, and the borrower can spend the money as they desire, making regular monthly payments.

Should you take out a personal loan for a security deposit?

Security deposits are a typical requirement anytime you’re renting or leasing a property. But if you already have funds tied up in your current property’s security deposit and need to give your new landlord the first month’s rent, you may not have enough cash on hand.

A personal loan can be one option for covering your security deposit, but it isn’t always the wisest financial decision. 

Taking out a personal loan for a security deposit could indicate you’re not quite ready to move into a new home or your new property is too expensive for your current budget. Instead, saving up for a few more months or finding a property with a smaller upfront deposit requirement might be the answer, and it would save you from taking out a personal loan.

Pros and cons of a security deposit loan

As with any financial decision, before taking out a personal loan for a security deposit, we advise considering the advantages and disadvantages.

Pros

• A fast personal loan can give you access to the cash you need to secure housing immediately.

• A personal loan may improve the credit score of renters with poor credit if you make on-time payments throughout the repayment process.

Cons

• Personal loans charge interest, which means you’ll pay more to borrow the money.

• Going into debt to pay for a security deposit may be a sign 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.

>>Read more: Can personal loans improve your credit score?

Lenders offering security deposit loans

If you’ve considered the pros and cons and are sure a personal loan is right for your situation, we’ve researched the best security deposit loans for excellent, good, fair, and even thin credit. Read on to find out more about these lenders.

Ensure you only take out what you need to limit the total cost of your loan.

• For good credit (660+): SoFi
• For fair credit (600 – 660): Upgrade
• For bad credit (599 or below): Upstart

Best for good credit: SoFi

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Editorial rating: 5 out of 5

• Fast, easy application: Get a decision in minutes
• Loan amounts: $5,000 – $100,000

SoFi is an online lender offering personal loans of $5,000 or more with competitive rates and, in most cases, no fees. Applying online can take less than 60 seconds with no impact on your credit score.

If you qualify, SoFi can be a terrific option for fast cash. The majority of borrowers (86% in 2021) get their loan funds the same day they’re approved. This means you won’t miss out on an in-demand apartment or the perfect house because you don’t have the cash for a security deposit.

• Soft credit pull to check rates? Yes
• Deposit time: As soon as the same day
• Fixed APR: 8.99% – 29.99% with all discounts
• Repayment terms: 24 – 84 months

Best for fair credit: Upgrade

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Editorial rating: 4.9 out of 5

• Credit health tool to monitor your credit score and get personalized recommendations
• Loan amounts: $1,000 – $50,000
• 15-day grace period before late fee is assessed

Upgrade is a terrific option for borrowers with bad or fair credit and those who need smaller loans. Personal loans are available for as little as $1,000, and you can get funds within one business day of approval to lock in your home or apartment with a security deposit when you need it most.

You can check rates with Upgrade without affecting your credit score to ensure you’re satisfied with your loan terms before submitting the final application. Upgrade charges an origination fee of at least 1.85% of the total borrowed amount, but you’ll pay no fees to apply. 

• Soft credit pull to check rates? Yes
• Deposit time: As soon as the next day
• Rates (APR): 8.49% – 35.97%
• Repayment terms: 24 – 84 months

Best for thin credit: Upstart

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Editorial rating: 4.8 out of 5

• Uses artificial intelligence to provide competitive rates based on unique creditworthiness
• Checking your rate won’t affect your credit score
• Loan amounts: $1,000 – $50,000

Sometimes, your issue isn’t that you have a bad credit history—it’s that you don’t have one (or much of one) at all. 

For borrowers with a thin credit profile, Upstart may be worth a look. Upstart is an online lending platform that partners with banks to provide personal loans for almost anything. The platform’s lending model considers education, employment, and other variables to determine eligibility, so borrowers with an insufficient credit history can qualify—even if they don’t have a score.

This model leads to 27% more approvals and 16% lower rates than traditional models. Personal loans are available for as little as $1,000; you can get funds as soon as the next business day.

• Soft credit pull to check rates? Yes
• Deposit time: As fast as one business day
• Rates (APR): 6.7% – 35.99%
• Repayment terms: 36 or 60 months

Alternatives to taking out a personal loan for a security deposit

Before taking out a personal loan for your next security deposit, consider the following options instead:

• Use a high-yield savings account to set the money aside over several months. Planning for your next security deposit well in advance can ease the pinch and make saving easier.
• Put your tax refund toward the deposit. If you know you’ll get money back at the end of the tax year, consider planning your move around that refund. 
• Use your financial aid refund. If you get money back each semester, save that money for your security deposit. You could even time your move to coincide with your refund disbursement.
• Borrow from a loved one. Rather than pay interest on a security deposit loan, see whether your parents, a sibling, or another trusted loved one will lend you the money. This may be an appealing option if you’re getting a security deposit back from your current home once you move out, so you can repay the debt quickly.