Should You Take Out a Personal Loan to Pay Your Rent?

Renting an apartment can be cheaper than buying a home, which requires a down payment and closing costs. Even so, renting isn’t exactly cheap. 

Aside from obvious expenses like your rent and utilities, other costs you must account for include:

• First and last month’s rent
• Security deposits
• Pet deposit
• Moving fees
• Parking fees
• Storage fees
• Deposits for utility services

If you have little income, you may have to get creative and find other ways to get your hands on cash, such as applying for a personal loan to cover your rent.

Although this is an option, is it the right choice for you? And most importantly, does it make sense to take out a personal loan to pay your rent?

Why Would You Use a Personal Loan for Rent?

A personal loan is a very flexible loan that can be used for a wide range of purposes, including debt consolidation, home repairs, auto repairs, wedding expenses, and more.

So:

If you choose to use a personal loan to pay for rent, you can.

Personal loans are generally offered by banks, credit unions, and online lenders. Since some financial institutions don’t dictate how you spend funds, you can also use a personal loan to pay your rent.

No collateral needed

Personal loans can be either secured or unsecured.

An unsecured loan doesn’t need collateral and generally requires a good credit history. A secured loan can offer lower interest rates and higher chances of approval but you have to provide a security deposit.

If you need to take out a loan for rent, you probably don't have the collateral -- so it's going to be an unsecured personal loan for you.

Your credit will matter

Before getting approved for a personal loan, you must fill out an application and authorize a credit check. The lender will also verify your employment and income.

If you're considering a personal loan for rent, you should have a decent credit score before applying.

Guidelines for approval vary by bank, so you don’t always need perfect credit to qualify.

But if you have bad credit or no credit, you might have more success applying for a personal loan through an online lender or a credit union. The lending guidelines with these institutions may be more flexible.

Here’s a look at some of the benefits of taking out a personal loan to cover rent.

Curious how much a personal loan might cost you? Check out our personal loan calculator to give you an idea of your possible monthly payments and accrued interest:

Pros of Paying Rent With a Personal Loan

1. Builds your credit history

Getting a loan can establish your credit history.

And if you have an existing credit history, a personal loan helps improve your score.

But you’ll only improve your credit if you make your loan payment on time each month. A good credit score can also help you qualify for a mortgage loan in the future.

2. Wide borrowing ranges

Typically, personal loans range from $1,000 to $50,000. The amount you’re eligible to receive is based on your income and your credit score.

But even if you qualify for a large amount, you should only borrow what you need.

Funds can be used to cover your rent for an extended period of time, perhaps 6 months or 12 months.

For example:

Let’s say you’re renting a one-bedroom studio for $900 a month including utilities. If you find a bank, credit union, or online lender offering a large borrowing range, you could possibly apply for $10,800 to cover your housing expenses for an entire year.

3. Provides a financial cushion

If you’re not sure whether your income is enough to live on your own, use a personal loan as a safety net and keep the funds in savings—in case you need to touch it for monthly expenses.

Having a cushion can give you the confidence to move out sooner.

4. Fast, simple comparison shopping

Today, comparing interest rates has never been easier. Research maximum loan amounts and interest rates offered by different financial institutions before applying for a loan.

This can ensure getting a favorable rate and saving money on interest.

5. Easier approvals with a secured loan

Unsecured personal loans are attractive because they don’t require collateral. But it’s easier to qualify for a secured loan when you don’t have the best credit history. Keep in mind, the value of the collateral must match the loan amount.

For example:

If you apply for a $7,000 personal loan to cover rent, you’ll need to pledge an asset that can be converted into cash to repay the loan if you default. This might include a paid off vehicle that’s worth at least $7,000. If you use a car as collateral, the lender may hold the title until you repay the loan.

6. Can help you negotiate your rent

If you use a personal loan to pay the first few months of your rent in advance or to pay your entire lease in advance, a flexible landlord might offer a discount on the rental rate.

Having the funds of a personal loan to back you up in the beginning, might be able to help you save some cash on rent in the long run.

Cons to Paying Rent With a Personal Loan

Despite possible advantages of using a personal loan to cover rent, there are also some disadvantages you need to know about.

1. You’ll pay interest on the loan

Personal loans involve interest, so the amount you pay back will be more than what you actually paid in rent.

For example:

If you get a $10,800 personal loan with a 36-month term at 6% interest, you’ll pay about $328 a month. You’ll also pay an additional $1,028 in interest over the course of three years.

2. You’re putting yourself in debt

A personal loan puts you in debt, and this type of debt is different from buying a home because an apartment isn’t an asset.

Each mortgage payment builds equity and puts you closer to owning the property outright. Getting into debt to cover rent doesn’t increase your personal net worth. And unlike a mortgage, rent continues indefinitely.

3. You may underestimate your financial needs

If you’ve never lived on your own, you could underestimate your monthly expenses and borrow less than you need. Unexpected costs can create a financial bind and leave you cash-strapped.

For example:

You may anticipate needing $900 per month for the next 12 months and only borrow $10,800. If you end up spending an extra $150 a month, you’ll spend more than you allocated for each month and you’ll run out of money sooner than expected, making it difficult to cover your rent.

4. Can be harder to get a loan with no credit

Even though you can get a secured personal loan with no credit, there are no guarantees. Some lenders may reject your application if you don’t earn enough, or the bank may require a cosigner. This is someone who agrees to take responsibility for the loan if you default.

5. No guarantee that you’ll get an apartment

Even if you qualify for a personal loan, a landlord may consider you too risky and deny your rental application if you don’t have a prior rental history or little to no income. 

Should You Take Out a Personal Loan for Rent?

While it is possible to get a personal loan to cover rent, this might not be the best decision financially.

A personal loan creates debt and you’re basically digging yourself into a hole without the benefit of building equity.

So:

If you can postpone moving out, you’re better off avoiding a personal loan and saving up your money. Truthfully, if you need a personal loan to move out, you’re probably not ready for this responsibility.

If you’re desperate and can’t postpone moving out, shop around and compare interest rates among reputable lenders before applying for a personal loan. Determine how much you need to live on, and only borrow what you can afford to pay back to avoid late payments and a damaged credit score.

Ask yourself a few questions to decide whether you’re ready to get your own apartment:

• Am I able to repay the personal loan in a timely manner?
• Am I financially and mentally ready for the responsibility of renting an apartment?
• Am I already in significant debt?
• Can I afford to furnish the place, and can I afford unexpected costs?

If you don’t feel confident about using a personal loan to cover rent, consider other alternatives:

• Pay your rent with a credit card. If you have a credit card with a 0% introductory rate, use this credit card to cover rent until your financial outlook improves. This option is only suggested for those who have landlords that accept credit card payments. Introductory rates are temporary, so pay back the card as soon as possible.
• Lower your standards. You might dream of living in an up-and-coming part of town. But if you’re determined to live on your own without a personal loan, be realistic. Use Craigslist to search for affordable apartments in your area, or make an appointment with your local housing agency to get information on qualifying for affordable housing subsidies.
• Get a roommate. It might be easier to move out if you split the cost of rent and household expenses with a roommate. Talk to a friend or coworker about rooming together, or use various networks out there that can connect you to someone.

Conclusion

Whatever you decide, make sure the choice benefits you financially and aim to live beneath your means.

This way:

You can start increasing your disposable income and building your savings.

The more cash you put into savings, the sooner you’re able to stop renting and put a down payment on your own house—which can be your greatest financial asset.