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When you’re short on cash and can’t afford your rent, you may not know what to do. One solution to consider is a personal rental loan. It can provide you with quick access to the cash you need to keep the roof over your head.
However, this short-term solution may not be the right solution for everyone. Before you take out a loan to pay rent, learn what types of loans you can use and what the pros and cons are so you can make an informed decision.
When Is It A Good Idea To Get A Rent Loan?
Since a rental loan comes with additional costs, such as interest and fees, it’s usually not a good idea to take out one, unless you don’t have another option. However, there are some situations where using a loan to pay your rent may make sense. For example, it might make sense if you are experiencing a temporary financial setback, but expect to get a new job or promotion soon and can afford to pay off the loan quickly to minimize interest charges.
When Is It A Bad Idea To Get A Rent Loan?
If you can’t afford to pay off the rent loan, it’s a bad idea to take out one. It could damage your credit score and plunge you into a deeper financial hole. You’re probably better off asking your landlord for an extension or payment plan, signing up for a rental assistance program, or getting financial help from a close friend or family member. family.
Types of loans to pay rent
While personal loans are generally unsecured, that is, they do not require collateral – a plus in securing the loan – there are other types of personal loans. Each loan requires the borrower to repay the loan in fixed monthly installments and usually comes with fixed interest rates.
Unsecured personal loans
Since unsecured loans are not associated with an asset, this type of loan is riskier for the lender. To offset this risk, the lender may charge a higher interest rate. To assess your ability to repay the loan, the lender will look at your credit rating, debt-to-income ratio (DTI), and income.
If you don’t meet the lender’s minimum credit score requirement, or if you have too much debt or too little income, a lender may deny your loan application.
One of the advantages of using an unsecured personal loan over a secured personal loan is that the lender cannot foreclose your assets if you default on the loan, unless they have the right to repossess your assets. authorization from a court. However, you will still damage your credit score if you miss a payment or default on the loan.
Guaranteed personal loans
Unlike an unsecured personal loan, a secured personal loan requires a borrower to pledge an asset as collateral to secure the loan. Common types of guarantees include a savings account, investments, or your car. If you default on a secured personal loan, the lender can repossess the collateral to settle the debt.
Because an asset secures these loans, they are less risky for the lender, so you might be eligible for this type of loan even if you have bad credit. Also, the lender may offer you a lower interest rate than you would get with an unsecured loan.
An emergency loan is an unsecured personal loan that you can use to cover emergency expenses such as medical bills and rent payments. These types of loans are generally smaller amounts – you can borrow as little as $ 250.
Related: How to apply for a personal loan
Benefits of using a loan for rent payments
- Quick access to cash: If your rent is past due or about to fall due, some lenders may deposit your loan funds on the same day or within a week.
- May be cheaper than using a cash advance: Using a rent loan can be cheaper than taking out a cash advance on your credit card to cover the rent. While a cash advance gives you access to money immediately through an ATM, it usually has an annual percentage rate (APR) that is higher than your card’s interest rate for purchases.
- Flexible loan terms: Lenders typically offer terms ranging from two to seven years. A longer loan term may reduce your monthly payments, but you will pay more interest over the life of the loan.
- Can improve your credit score: Payment history represents 35% of your FICO score. If you make payments on time, you could improve your credit score.
Disadvantages of using a loan for rent payments
- Interest charges: To make a profit on the loan, the lender will charge you interest. Even if you have a good credit score (at least 670), you will still have to pay interest charges. If your score is in the fair credit range – 580 to 669, depending on the FICO credit scoring model – you will likely pay a higher interest rate. Some lenders charge a maximum interest rate of 36%.
- Fresh: While there are no-fee loans, some lenders may charge you origination fees, prepayment penalties, and late fees. Make sure you find out about the fees before signing the loan agreement; these fees can increase your borrowing costs or reduce your loan amount.
- Potential damage to credit score: If you miss a payment or default on the loan, you can damage your credit score. This can make it harder for you to qualify for future loans and increase your borrowing costs.
- No more debt: Having to pay off a rent loan on top of your future rent payments can reduce your cash flow, making it harder to meet your financial goals.
Alternatives to rental loans
If you want to avoid paying interest and potential charges on a rent loan, consider these alternative options to cover your rent payment.
Borrow money from family
A family loan can help you minimize the amount of interest you pay compared to a rental loan. For example, the family member may charge you little interest and offer you a more flexible repayment schedule. By bypassing the formal application process, you will also avoid creation and application fees. Make sure you repay the loan as agreed to maintain a healthy relationship with the family member.
Rental assistance programs
Depending on your income, you may be eligible for housing assistance programs in your area. To see if there are programs in your area, call 2-1-1 or check the Department of Housing and Urban Development (HUD) database.
Move to a cheaper location
If you can’t afford your current rent, find an apartment or house in your area that fits your budget. While this may not help you solve your current problem of not being able to pay rent, it may be a better long-term solution than using a rental loan.
Get a roommate
Having a roommate can cut your bill in half if you divide utility bills and rent evenly. It can help you make the rent more affordable. Also, you use the extra money to create an emergency fund or to save for other goals like retirement.
Increase your income
If you don’t want to move to a cheaper location or find a roommate, you should focus on increasing your income. To increase your income, consider going into a lucrative business or starting a business. The additional income might be enough to help you stay in your current residence