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Guide to Security Deposit Loans

What Are Security Deposit Loans?
Austin Kilham
Austin KilhamUpdated March 13, 2023
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When you rent a home or apartment, your landlord may require you to put down a security deposit. Security deposits are often equal to your first month’s rent, but some landlords may ask for the first month’s and last month’s rent. If you damage the property or don’t pay your rent, the landlord will keep some or all of your security deposit to cover the cost.Security deposits can add up to a significant amount of money, especially if you live in a hot rental market. If you don’t have the funds, you may want to consider a security deposit loan, which could help you get the money you need. However, there are pros and cons to these loans. Read on to learn more about security deposit loans and how they work.

What Are Security Deposit Loans?

A security deposit loan is a type of personal loan offered through banks, credit unions, and online lenders. Many loans — such as auto loans, mortgages, and student loans — specify how you can use the money you borrow. However, personal loans offer flexibility. There’s a wide variety of purposes you can use them for, including covering the security deposit on a rental, or even as a loan for home improvement.

How Do Security Deposit Loans Work?

Security deposit loans are installment loans. You get the money in one lump sum and pay it back monthly with interest. Like other personal loans, the interest rate you get with loans for security deposits is determined by several factors, including your income, existing debts, financial history, and your credit score. Lenders see borrowers with higher credit scores as less risky, and they tend to offer them lower interest rates. If you have poor credit, lenders consider you riskier as a borrower. They worry, for instance, that you might default on a personal loan. To compensate for this risk, they’ll typically charge higher interest rates. Security deposit loans can come in two types: secured and unsecured personal loans. Most personal loans are unsecured, which means you don’t need to use collateral to back the loan. Unsecured loans typically have higher interest rates.Secured loans require collateral. If you fail to repay the loan, the lender can seize your collateral. Interest rates for secured loans tend to be lower. The amount you can take out with a personal loan ranges widely. You could consider getting a small personal loan for $2,000 or less, or a loan for tens of thousands of dollars. However, it’s wise not to borrow more money than you need. 

Why Are Security Deposits Needed 

Landlords typically ask for security deposits as protection in case a tenant breaks the rules of the rental agreement. If you damage the property or fail to make your payments, the landlord can use all or some of the security deposit to cover repairs, do any necessary cleaning, replace lost items like keys, and compensate for unpaid rent. If they keep your deposit, they should send you a letter explaining why they are keeping it and an itemized list of costs. If you make all your rent payments on time and there is no damage to the property, your landlord will return your deposit. The maximum amount a landlord can charge for a security deposit typically varies by state.

What Is the Average Cost of a Security Deposit Loan?

The cost of a loan for a security deposit largely depends on the interest charges on the loan. The average interest rate for 24-month personal loans at commercial banks is 11.23%, according to the St. Louis Federal Reserve. If you’ve got good credit, you may get a lower interest rate. And if your credit is poor, the rate could be much higher. In addition, there may be loan fees you have to pay, which could include an origination fee that helps cover the cost of underwriting the loan, a late fee for failing to make a payment, and prepayment penalties if you pay off your loan early. You might be able to negotiate with your lender for lower fees or to have them waived entirely. 

Are Security Deposit Loans Hard to Get?

Generally, loans for security deposits are not hard to get, but it depends on your circumstances. Borrowers with higher credit scores typically have an easier time qualifying for loans. If you have a low credit score, you may want to consider lenders who offer loans for borrowers with poor credit. Another option is to add a cosigner who has good credit to your loan. The lender will consider the cosigner’s credit score when you apply for the loan. Plus, the cosigner agrees to make payments if you fail to do so, which also lowers the risk to the lender.  

Pros and Cons of Using a Loan for a Security Deposit

Before applying for a security deposit loan, it’s important to weigh the advantages and disadvantages to make sure this borrowing option makes sense for you. For instance, one of the benefits of getting a personal loan is that these loans offer flexible borrowing amounts. You can take out exactly what you need to cover your deposit. And if you get an unsecured loan, you won't have to put up collateral.Personal loans also generally offer fast access to cash. Some lenders may even be able to provide funding the same day you’re approved. However, taking out a loan to cover a security deposit is more expensive than paying the deposit with cash because of interest and fees. And while there isn’t necessarily a limit on how many personal loans you can have, you’ll want to avoid overextending yourself with too much debt.Finally, late or missed payments could damage your credit. If you default on a secured loan, the bank might take the property you used to secure the loan. Here’s a comparison chart of the pros and cons of using security deposit loans. 
Pros of Security Deposit LoansCons of Security Deposit Loans
Flexible borrowing limits so you can borrow exactly what you need. More expensive than paying in cash, due to interest and fees. 
Unsecured personal loans don’t require backing with collateral.If your credit is poor, you may need to put up collateral. Failing to make payments can result in the loss of that property.
Quick access to cash. Some lenders offer same-day funding.Failure to pay can damage your credit score. 

The Takeaway

If you’re ready to move into a rental, but don’t have the money for a security deposit, a personal loan could help you cover the cost. Personal loans allow you to borrow the amount you need and typically offer fast funding. However, these loans are more expensive than paying in cash, and you can damage your credit if you fail to repay them. Consider all your options.If you decide to pursue a personal loan as a security deposit loan, be sure to shop around to get the lowest interest rate and best terms. Lantern’s personal loan tool can help you easily compare rates from multiple lenders all at once, and in one place.

Frequently Asked Questions

What is a security deposit loan?
What is the most a security deposit can be?
Can I use money from a loan for a security deposit?
Photo credit: iStock/KentWeakley

About the Author

Austin Kilham

Austin Kilham

Austin Kilham is a writer and journalist based in Los Angeles. He focuses on personal finance, retirement, business, and health care with an eye toward helping others understand complex topics.
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