Security deposits are necessary for apartment rentals, and not everyone can afford them. That’s when a security deposit loan may come in handy.
Typically equal to the first month’s rent—or sometimes first and last month’s rent—this amount is usually requested by a landlord in order to guarantee that a tenant will pay rent and properly care for an apartment. If a tenant fails to pay rent or damages, the landlord will keep all or part of the security deposit as compensation.
Read on to learn more about your options when it comes to security deposit loans, as well as whether or not they are the right choice for you.
On this page:
- Types of Security Deposit Loans
- Using a Personal Loan for a Security Deposit
- Pros & Cons of Using a Security Deposit Loan
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Types of Security Deposit Loans
There are two main types of personal loans: secured and unsecured. An unsecured loan does not require the borrower to put up collateral (personal property, such as a car) to be approved. As a general rule, borrowers must have good credit to be approved for an unsecured personal loan. In addition, unsecured loans often have higher interest rates than secured personal loans.
Secured personal loans involve the use of collateral. Because the bank will have something to seize in the event that the borrower defaults on the loan, secured loans tend to have lower interest rates. They are usually a better option for people with a bad credit history.
Using Personal Loans to Cover a Security Deposit
Because personal loans can be used to cover a security deposit, it can be helpful to better understand how these loans work.
Personal loans are offered by banks, credit unions, online lenders, and other financial institutions. Applicants are approved based on their credit score and financial history, with lower interest rates and terms offered to applicants with higher credit scores and a better history of paying off their bills on time.
If you don’t have excellent credit, you can take out a secured loan to receive lower rates. The reason a secured loan may help you receive a lower rate is due to the collateral you are attaching to the loan in the event you can’t keep up with repayment.
Once the loan is approved, the funds are disbursed, and the borrower can spend the money as he or she desires. Then the borrower will make regular monthly payments to repay the loan.
Pros & Cons of a Security Deposit Loan
- A personal loan may improve the credit score of renters with poor credit if you make on-time payments throughout the repayment process. (Read: Can a personal loan improve your credit score?)
- The interest on the loan will ultimately mean you are paying more to borrow the money.
- Going into debt in order to pay for a security deposit may be a sign that you aren’t financially ready to live independently. You may want to consider other places to rent from that may be more affordable.
While a personal loan can be used for a security deposit, it probably is not the best idea from a financial standpoint. Personal loans create debt, and when they are being used to rent an apartment, they aren’t building equity. If you need a personal loan for a security deposit, the better idea might be to wait to get an apartment until you can afford the deposit. If you can’t wait, be sure to comparison shop to get the best possible rate.
Author: Jeff Gitlen
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