security deposit loans

Security Deposit Loans: Do They Make Renting Easier?

The cost of rent in the U.S. is skyrocketing. Would-be tenants struggle to save up for increasingly expensive security deposits and other associated moving costs. The table below shows the 10 U.S. cities with the fastest-growing rents. If you can’t afford to pay thousands of dollars out of pocket, how can you keep up with rising costs? Consider financing your move with a security deposit loan.

City

Median two-month deposit 2BR

Y/Y rent change

Median 1BR rent

Median 2BR rent

M/M rent change

Mesa, AZ$2,2905.10%$919$1,1450.40%
Henderson, NV$2,7943.90%$1,127$1,3970.00%
Nashville, TN$2,3283.60%$948$1,1640.10%
Phoenix, AZ$2,2063.50%$885$1,1030.20%
Austin, TX$2,9423.40%$1,192$1,4710.10%
Las Vegas, NV$2,3903.40%$964$1,1950.10%
Colorado Springs, CO$2,5443.20%$987$1,2720.00%
Tampa, FL$2,5902.90%$1,040$1,2950.30%
Stockton, CA$2,6102.90%$995$1,3050.10%
Arlington, TX$2,5282.80%$1,018$1,2640.20%

Source: ApartmentList rental data February 2020 and SuperMoney analysis

Often, the biggest challenge when pursuing a new apartment isn’t the cost of the rent. You’ve done the math; you know what you can afford. The crunch comes when you have to put down the security deposit for your new place. As the table above shows, a security deposit of more than $2.5K is common for a two-month deposit and some landlords charge much more.

Depending on the landlord, your security deposit can cost anywhere from one month’s rent to a whopping three month’s rent. (If your prospective landlord is charging more than that, do some research to find out whether your state has any restrictions on the cost of security deposits).

Let’s say your landlord is charging more than you can afford for your security deposit. Can you get a loan to cover the difference? The short answer is yes! We’ll walk you through your best options for a security deposit loan, plus some alternative ways to finance your security deposit.

Financing your security deposit with a personal loan

If you’re looking for security deposit loans, what you really need is a personal loan.

There are two types available, secured and unsecured loans. Which is right for you? The answer depends on your available assets and your credit score.

Unsecured loan

To get approved for this type of loan, you need to have good credit. The better your credit score, the lower the interest rate.

Unsecured security deposit loans are available through banks and other financial institutions, such as credit unions and online lenders. Approval rests on the applicant’s financial history and creditworthiness.

If you have a strong credit score, an unsecured loan can be a great way to finance your security deposit. If you don’t have excellent credit, a secured loan will offer you lower rates.

Secured loan

As the name implies, you’ll pledge your own assets as collateral to secure this type of loan. Having collateral provides security for lenders, allowing them to loan money to borrowers with less-than-perfect credit. This additional security also lets lenders charge lower interest rates for secured loans.

If you have bad credit, this could be a great way to borrow the funds you need — and to raise your credit score by establishing a healthy payment history! However, for this route to work, you’ll need an asset with equivalent or greater value than the cost of your security deposit. And remember that if you fail to pay off the loan on time, you’ll forfeit the assets that you pledged as collateral.

How to get a personal loan for your security deposit 

Here are the steps you’ll need to take when applying for a personal loan.

Work out exactly how much you need. Because you’re paying interest on the loan, you won’t want to borrow more than necessary.

Lenders set minimum and maximum loan amounts, so choose a lender who fits your criteria. It would be best if you didn’t borrow more than you want or less than you need. 

Check your credit score

Before you start applying, it’s essential to know your credit score. Some lenders want an excellent credit history; others are more relaxed with their requirements. Knowing your credit score will allow you to target lenders more favorable to your circumstances.

Know the options

To generate your offer, each lender will analyze your credit history and income. Different lenders will offer different terms, which may be more favorable. Longer loan terms mean cheaper monthly payments, but higher overall costs. Choose the loan with the lowest interest and shortest term whose payments you can comfortably afford.

If your credit history doesn’t look good, you may get better terms and conditions with a secured loan. But for this, you must put up collateral, like a car or savings account. 

Compare your offers

With a selection of pre-qualified offers, you’ll be able to compare each one. Look at the amount, interest rate, length of the loan, and monthly payment.

Check the fine print

Be thorough when reading the terms and conditions of the loan. Keep an eye out for any hidden fees or costly penalties. Is there a chance you’ll want to pay the loan off early? In that case, look out for prepayment penalties. 

Apply with your selected lender

Found a lender? Great! All you need to do now is send a formal application. You’ll need identification documents, such as: 

  • A passport.
  • Your driver’s license.
  • Social Security card.

You’ll also need to verify where you currently live with a copy of your lease or utility bill. Plus, you’ll have to provide proof of income with one of the following:

  • Your bank statement.
  • Your tax return.
  • A W-2.

Pros and cons of security deposit loans

WEIGH THE RISKS & BENEFITS

Here is a list of the benefits and the drawbacks to consider.

Pros
  • If you can’t afford the security deposit out-of-pocket, a loan can help you secure your desired apartment.
  • Making timely payments on a loan can improve your credit score.
Cons
  • Loan interest means that you’ll pay more than the cost of the deposit.
  • Finding an affordable loan takes time and research.
  • Failing to make timely payments will hurt your credit.

How else can you finance your security deposit?

Use a 0% APR credit card

For this route, you’ll need good to excellent credit.

With a high enough credit score, you could qualify for a credit card that charges 0% APR for a set promotional period (typically six to 18 months). If you’re able to pay the charge off in full before the end of the introductory period, you could finance your deposit interest-free.

However, don’t let this strategy sabotage your credit score. Ideally, your credit utilization ratio should be 30% or lower. In other words, you should only borrow 30% of your total credit limit at a given time. If your security deposit costs as much as your total credit limit, your credit score could take a hit.

If you decide to put your security deposit on an existing card, consider asking your issuer to increase your credit limit. And to avoid paying costly interest, be sure to pay off the charge as soon as possible.

Use a startup

Startups like Rhino and Rentberry offer a novel solution to the security deposit loan conundrum. While the methods and costs vary from startup to startup, the premise is the same.

Prospective tenants pay a nonrefundable fee, equal to a percentage of the security deposit, to the company. Some of the costs are kept as commission, but most of the tenant’s money goes to the landlord. 

These companies offer an insurtech solution known as a surety bond. This is a three-way insurance contract between the company, the renter, and the landlord. While relatively new, these companies have saved renters millions of dollars in security deposits.

To summarize

Looking to cover the cost of your security deposit? Here are your options:

  • An unsecured personal loan will let you get the apartment you need. With a good credit score, you can shop around for the best terms.
  • A secured personal loan will also get you the apartment. At the same time, you can use it to build your credit rating.
  • A credit card could provide the necessary cash at the best possible interest rate if your credit is good.
  • Or you can bypass a loan altogether and go for the insurtech solution.

With these simple guidelines, you can find the solution that best suits your circumstances and lock down your dream apartment!

To get started, compare personal loans side-by-side.