Many people are feeling the crunch of the pandemic due to loss of employment or mounting debt. Worrying you won’t have enough money to cover your biggest monthly expense — rent — is overwhelming. Falling behind on rent can lead to eviction, and some tenants might consider taking out a personal loan to pay rent. Yes, a loan offers quick assess to cash but it is just a short-term fix to a budget shortfall.
Because many short-term personal loans offered by banks, credit unions and online lenders are pretty flexible, they can go towards whatever you want, including your monthly rent. There are two types of loans:
- Secured personal loans require you to put up collateral — an asset such as a car — to secure the loan. These secured personal loans usually have lower interest rates than unsecured loans. If you default your payments, you could lose your collateral.
- Unsecured personal loans don’t require collateral, so the amount you can borrow and the interest rate depend on your credit history. If the lender thinks you’re a risky borrower, you’ll pay a higher interest rate.
Borrowing from a financial institution if you’re short on cash may seem like a great solution. However, you should never use a loan to pay your rent. Here’s why.
1. Personal loans are expensive
Borrowing money from the bank means you will be accumulating more debt: Every month, you’ll be required to pay rent to your landlord, plus a fixed installment payment on your new loan.
This kind of debt isn’t considered ‘good debt’ the way mortgage payments are, because your apartment isn’t an asset towards which you’re building equity until you own the property. In other words, putting yourself in debt to pay rent doesn’t boost your personal net worth.
Plus, owing to a loan payment on top of your monthly rent will further reduce your cash flow, making it difficult to dig yourself out of a financially strapped hole.
2. You’ll owe interest on the loan
You may think you’re borrowing $5,000, but the amount you have to pay back is significantly more than that. Because many short-term loans come with high interest rates and longer repayment terms, you could be paying a few months’ worth of rent — just in interest payments!
If you have a bad credit score, you could be charged an interest rate of 30 percent or more, which could add up to thousands of dollars a year. That’s over and above your loan installments.
3. Your credit score will suffer if you miss any loan repayments
While experts say that getting a personal loan can establish your credit history or improve your credit score to help you qualify for a mortgage down the road, this only holds true if you actually pay each installment on time.
One way lenders and landlords determine your credit score is by checking your payment history. They want to see if you consistently pay your debts on time. Miss just one installment, and your credit score can tumble by up to 180 points. Damage to your credit score can increase your future borrowing costs and make it harder to get new loans.
Bottom line: If you’re not sure you will be able to repay the rent loan, don’t take one out.
4. You could be charged extra fees on top of everything else
You might be able to find a financial institution that doesn’t charge you anything except your monthly payments plus interest, but many lenders slap extra fees onto your loan agreement. These can include application fees, processing fees, pre-payment penalties, late fees and other administrative charges – all adding up to increase your borrowing costs.
5. Your landlord-tenant relationship might be affected
Before you were an official tenant, your landlord conducted a background check, called your references and verified your credit score, that means they believed you were able to afford the monthly rent. If you’ve fallen behind on your rent, your landlord might begin to worry that your next check might bounce, or that you’ll break your lease.
And if your landlord discovers you have to borrow money to pay rent, things might get awkward. A better solution is to contact your landlord and try to arrange a repayment schedule you can commit to and afford.
If you’re struggling to cover your payments, there are other steps you can take.
Check if your lease agreement includes a grace period
Many lease agreements feature a rent grace period — a specific timeframe after the rent is due during which tenants can pay without any penalties. Usually, you have five days after your rent is due to pay your landlord.
Be honest about your situation when speaking with your landlord, preferably before you have a late rent payment on your record. If you’ve been a reliable tenant in the past, your landlord may extend the grace period for you, offer to defer a payment or two or work out an installment payment plan.
Cut down on your spending
One way to free up some much-needed cash is to cut back on unnecessary expenses, like restaurants, gym memberships, subscriptions or entertainment.
Boost your income
To bridge a budget crunch, you can try adding a side gig that increases your cash flow. Or, put unused or unwanted items up for sale online.
Find a roommate
Splitting the monthly rent and other expenses is easier when you can share those costs with someone. Think about getting a friend, co-worker or family member to move in with you.
Move to a less expensive apartment
If you can’t afford to pay your current rent, look for a cheaper place to live. Ask your landlord if you could sublet your apartment — don’t break the lease because that can mean stiff penalties.
Reach out to local and national organizations
Instead of using a loan to pay rent, you can get help from the government and charitable organizations that provide rent relief or ongoing financial support. For example, you could be eligible for government initiatives such as the Housing Choice Voucher Program (Section 8). Call 2-1-1 and find programs in your area on the Urban Department of Housing and Urban Development’s (HUD) database.
The Salvation Army, Catholic Charities and Modest Needs all offer housing and rent assistance.
Think ahead
Lastly, you may want to meet with a credit counselor who can help you figure out how to overcome debt and get your finances back in shape. There are many ways to get back on track without taking on more debt and putting your credit score in jeopardy.
