If You Can’t Afford Rent, Should You Open A Loan To Pay It?

When you’re running low on cash and can’t afford your rent, you can feel uncertain about what to do. One solution to consider is a personal loan for rent. It can provide you with quick access to the cash you need to keep the roof over your head.

However, this short-term fix might not be the right move 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 rent loan comes with additional costs, such as interest and fees, it’s usually not a good idea to take one out, unless you have no other option. However, there are some situations where using a loan to pay your rent might make sense. For example, it could make sense if you’re experiencing a temporary setback financially but expect to get a new job or promotion soon and can afford to repay the loan fast to minimize interest charges.

When Is It a Bad Idea to Get a Rent Loan?

If you can’t afford to repay the rent loan, then it’s a bad idea to take one out. Doing so can damage your credit score and dig you into a deeper financial hole. You’ll probably be better off asking your landlord for an extension or payment plan, enrolling in a rental assistance program or getting financial help from a close friend or family member.

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Types of Loans to Pay Rent

Although personal loans are usually unsecured, meaning they don’t require collateral—an asset to secure the loan—other types of personal loans exist. Each loan requires the borrower to repay the loan in fixed monthly installment payments and typically come with fixed interest rates.

Unsecured Personal Loans

Since unsecured loans don’t have an asset attached to them, this type of loan is riskier for the lender. To compensate for this risk, the lender may charge a higher interest rate. To assess your ability to repay the loan, the lender will review your credit score, debt-to-income (DTI) ratio and income.

If you don’t meet the lender’s minimum credit score requirement or you have too much debt or too little income, a lender may deny your loan application.

One benefit of using an unsecured personal loan over a secured personal is that the lender can’t seize your assets if you default on the loan, unless it has permission from a court. However, you’ll still damage your credit score if you miss a payment or default on the loan.

Secured 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 collateral include a savings account, investments or your car. If you default on a secured personal loan, the lender can repossess the collateral to satisfy the debt.

Because an asset secures these loans, they are less risky for the lender, so you might qualify for this type of loan even if you have bad credit. In addition, the lender might give you a lower interest rate than you’d receive with an unsecured loan.

Emergency Loans

An emergency loan is an unsecured personal loan that you can use to cover emergency expenses like medical bills and rent payments. These types of loans usually come in smaller amounts—you can borrow as little as $250.

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Related: How To Apply For A Personal Loan

Pros of Using a Loan for Rent Payments

  • Quick access to cash: If your rent is overdue or due soon, some lenders can deposit your loan funds the same day or within a week.
  • Can be cheaper than using a cash advance: Using a rent loan may be cheaper than taking out a cash advance from your credit card to cover the rent. Although a cash advance gives you access to cash immediately through an ATM, it usually has a higher annual percentage rate (APR) than your card’s interest rate for purchases.
  • Flexible loan terms: Lenders usually offer terms that can range from two to seven years. A longer loan term may reduce your monthly instalment payments, but you’ll pay more interest over the life of the loan.
  • May improve your credit score: Payment history accounts for 35% of your FICO score. If you make on-time payments, you could improve your credit score.

Cons 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’ll still have to pay interest charges. If your score falls in the fair credit range—580 to 669, according to the FICO credit scoring model—you’ll probably pay a higher interest rate. Some lenders charge a maximum interest rate of 36%.
  • Fees: Although loans without fees exist, some lenders may charge you origination fees, prepayment penalties and late fees. Be sure to inquire about 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 more difficult for you to qualify for future loans and increase your borrowing costs.
  • More debt: Having to repay a rent loan on top of your future rent payments can reduce your cash flow, making it harder to achieve your financial goals.
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Alternatives to Rent Loans

If you want to avoid paying interest and potential fees of 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 versus taking out a rent loan. For example, the family member might charge you little interest and offer you a more flexible repayment schedule. By sidestepping the formal application process, you’ll also avoid origination and application fees. Be sure to repay the loan as agreed to maintain a healthy relationship with the family member.

Rental Assistance Programs

Depending on your income, you may qualify for rental assistance programs in your area. To see if there are programs in your area, dial 2-1-1 or check the Urban Department of Housing and Urban Development’s (HUD) database.

Move to a Cheaper Location

If you can’t afford your current rent, look for an apartment or home in your area that fits your budget. Although this might not help you solve your current problem of not being able to afford the rent, it can be a better long-term solution than using a rent loan.

Get a Roommate

Having a roommate can cut your bill in half if you split the utility bills and rent evenly. This can help make the rent more affordable for you. Also, you use the extra money to create an emergency fund or save for other goals like retirement.

Boost Your Income

If you don’t want to move to a cheaper location or get a roommate, you should focus on boosting your income. To increase your income, consider picking up a lucrative side hustle or creating a business. The extra income might be enough to help you remain at your current residence