What are Security Loans and How do They Work?
Trevor Mahoney is a financial services writer and content creator based out of Los Angeles, California. He holds a Bachelors of Science in Finance from Santa Clara University. In his free time, he enjoys hiking and lounging on the beach.
At a Glance
Security loans are a unique personal loan type structured specifically to assist with the security deposit required by your landlord. The borrowing of the loan is for the sole purpose of meeting your deposit, meaning the loan amount is typically smaller than a standard personal loan. With a strong credit history, any borrower can increase their chances of getting approved for this type of loan.
In this article, you’ll learn:
What are security deposits?
For those who are unfamiliar with the term, a security deposit is a sum of money, typically equal to one month rent, that a tenant is required to pay prior to moving into an apartment or home they are going to rent. This sum of money is used as a security measure by landlords and is usually refunded in part or in whole after you move out of the location.
Why do landlords require a security deposit?
Security deposits may seem like a nuisance on the surface, but there are many valid reasons landlords almost always require them:
- Ensuring a tenant has access to funds for rent.
- Security in case the tenant violates the terms of the lease.
- Covers damages to the property.
- Information provided by a rental applicant is incomplete or unverifiable.
- You have been out of work for a long time.
- You own a pet.
There is no single reason for why a security deposit is required, but this is typically nonnegotiable when looking at moving into a new apartment or home.
What is a security deposit loan?
As outlined, a security deposit loan is a specialty personal loan that provides a borrower with the exact sum of money needed for their security deposit. Consider how expensive security deposits can be, without a loan for security deposit expenses you may be unable to move into your new residence. These loans can be offered by banks, credit unions, online lenders, and third-party lenders alike.
Related: Best Moving Loans
Types of security deposit loans
With rental security deposit loans, there are two main types to consider taking on as a borrower:
1. Secured deposit loan
Secured rental security deposit loans require some form of collateral when taking on the sum of the loan. If you cannot repay the loan, the lender may have the legal obligation to take ownership of whatever the borrower pledged as collateral. Secured loans are typically best for those unable to qualify for an unsecured loan due to poorer finances or credit history.
2. Unsecured deposit loan
The second type of security deposit loan is an unsecured loan that doesn’t require any collateral. With this type of loan, a borrower is given the sum of money in good faith with no added security, but they are still completely responsible for all payments in full.
Related: Secured vs Unsecured Personal Loan
Pros and cons of security deposit loans
Using a loan to pay your security deposit is a big decision, which is why all the pluses and minuses should be considered before contacting a lender:
- Quick access to security deposit funds in full
- Smaller sum of money borrowed than with a standard loan
- Smaller interest rate than with a standard loan
- Potentially no collateral required
- Interest on the loan means you are paying back more than just the security deposit in the long run
- Needing to take out a loan to make a security deposit payment could be a strong sign that you can’t afford monthly rent payments
Where can you get a security deposit loan?
There are a few main sources to get a security deposit loan. Each source comes with its own average interest rate and loan terms, so be sure to consider each option to determine which may be best for you when borrowing:
1. Online lenders
As one of the newest forms of lending, online lending has grown rapidly in popularity. Small personal loans are typically offered through online lenders, with sums as small as $500, making online lending a perfect choice for borrowing your security deposit loan. Be aware that online lenders may charge a higher interest rate than expected depending on factors such as income history and credit score.
2. Peer-to-peer lenders
Peer-to-peer lending is a great choice for smaller loan amounts such as a rent deposit loan. Peer-to-peer lending (P2P) essentially cuts out the middleman and allows a person to borrow money directly from another individual without a financial institution in between. Typically, P2P lending occurs using an online verifiable platform.
3. Banks and credit unions
Finally, banks and credit unions are your third option when seeking out a rent deposit loan. These traditional lenders offer competitive loan rates and very fair loan terms that can rival online lenders. Additionally, for bank lending, if you have a history with the bank you are considering borrowing from, you may be offered benefits or better terms. Be aware that borrowing from a credit union may require you to become a member.
No, an advance payment on rent is distinct from a security deposit and serves a different purpose. While an advance on rent allows you to pay months of your rent ahead of time, a security deposit does not go towards your rent. It’s best to think of a security deposit as a sum of money set aside by the landlord as a form of collateral in case a tenant violates their lease.
A security deposit loan will impact your credit if you fail to make the necessary payments on the loan in time. This can quickly hurt your credit score and leave a lasting stain on your credit history, so making complete payments in accordance with your financial obligation should be a top priority.
Most landlords have a blanket amount that the request from tenants for a security deposit, rather than picking and choosing what they charge per tenant. Due to this, it is unlikely that your credit score will influence the security deposit amount. However, your credit score will certainly impact the decision of whether you are approved for your apartment or home.
No, a rent deposit loan is typically used to pay an advance on rent whereas a security deposit is usually used to pay a security deposit.
Yes, you can use a security loan for apartment deposits. When you rent and move into an apartment or home, the landlord will typically require a security deposit. A security deposit loan is a specialty personal loan that provides a borrower with the exact sum of money needed for their apartment deposit.