Many people are feeling the pinch of the pandemic as a result of job loss or growing debt. Worrying about not having enough money to cover your largest monthly bill – rent — is debilitating. Rent arrears can result in eviction, and some renters may consider taking out a personal loan to pay their rent. Yes, a loan provides immediate access to funds, but it is only a short-term solution to a budget problem.
Because many short-term personal loans offered by banks, credit unions, and internet lenders are rather flexible, they can be used for anything, including your monthly rent. Loans are classified into two types:
Secured personal loans necessitate the use of collateral, such as a car, to secure the loan. The interest rates on these secured loans are typically lower than those on unsecured loans. If you are behind on your payments, you may forfeit your collateral.
Because unsecured personal loans are not collateralized, the amount you can borrow and the interest rate you pay are determined by your credit history. If the lender believes you are a high-risk borrower, you will be charged a higher interest rate.
Borrowing from a financial institution may appear to be an excellent alternative if you are short on cash. You should never, however, utilize a loan to pay your rent. This is why.
Personal Loans are Costly
Borrowing money from a bank means accumulating greater debt: Every month, you must pay rent to your landlord as well as a fixed installment payment on your new loan.
Because your apartment isn’t an asset toward which you’re generating equity until you own the property, this type of debt isn’t regarded ‘good debt’ in the same way that mortgage payments are. In other words, going into debt to pay your rent does not increase your personal net worth.
Furthermore, having a loan payment on top of your monthly rent would restrict your cash flow, making it tough to dig yourself out of a financial hole.
You Will be Charged Interest on the Loan
You may believe you are borrowing $5,000, but the amount you must repay is far greater. Because many short-term loans have high interest rates and lengthy repayment schedules, you could end up paying a few months’ rent only in interest!
If you have a low credit score, you may be charged an interest rate of 30% or higher, which could cost you thousands of dollars every year. This is in addition to your loan payments.
If You Fail to Make any Loan Installments, Your Credit Score Will Drop
While experts claim that taking out a personal loan can help you develop your credit history or enhance your credit score, this only holds true if you pay each month on time.
Checking your payment history is one method lenders and landlords assess your credit score. They want to know if you always pay your bills on schedule. Missing just one payment, may drop your credit score by up to 180 points. Damage to your credit score may raise your future borrowing expenses and make it more difficult to obtain new loans.
Bottom line: Don’t take out a rent loan if you’re not confident you’ll be able to repay it.
All Those Darned Fees!!
You may be able to find a financial institution that charges you nothing other than your monthly payments plus interest, but many lenders tack on additional costs to your loan arrangement. Application fees, processing fees, pre-payment penalties, late fines, and other administrative charges can all add up to raise your borrowing costs.
Your Landlord-Tenant Relationship May be Jeopardized
Before you became an official tenant, your landlord ran a background check, contacted your references, and confirmed your credit score, indicating that they believed you could afford the monthly rent. If you become behind on your rent, your landlord may become concerned that your next check will bounce or that you may breach your agreement.
And if your landlord discovers you’re borrowing money to pay your rent, things may get awkward. Contact your landlord and try to work out a payback schedule that you can commit to and afford.
If you’re having trouble making your payments, you have additional options.
Check to See Whether Your Lease Has a Grace Period
Many lease agreements include a rent grace period, which is a certain period of time after the rent is due during which renters can pay without penalty. Typically, you have five days following the due date of your rent to pay your landlord.
When dealing with your landlord, be honest about your circumstances, especially before you have a late rent payment on your record. If you’ve been a good renter in the past, your landlord may prolong the grace period, offer to delay a payment or two, or work out an installment payment plan with you.
Reduce Your Spending
Cutting back on needless spending such as restaurants, gym memberships, subscriptions, or entertainment is one way to free up some much-needed cash.
Increase Your Earnings
You can consider adding a side gig that enhances your cash flow to bridge a financial gap. Alternatively, you might sell unused or unwanted stuff online.
Look for a Roommate
Splitting the monthly rent and other expenses is easier when you have someone to share the costs with. Consider inviting a friend, coworker, or family member to live with you.
Move to a Cheaper Apartment
If you can’t afford your present rent, look for a less expensive location to live. You may also ask your landlord if you can sublet your apartment, but don’t break the lease or you’ll face harsh fines.
Contact Local and National Orgs
Instead of taking out a loan to pay your rent, you might seek assistance from the government and charitable groups that offer rent relief or continuous financial assistance. You may be eligible for government assistance such as the Housing Choice Voucher Program (Section 8). Call 2-1-1 to search the Urban Department of Housing and Urban Development’s (HUD) database for programs in your region.
Housing and rent aid are provided through the Salvation Army, Catholic Charities, and Modest Needs.
A Final Word from Jerome…
Finally, you might want to consult with a credit counselor to figure out how to conquer debt and get your finances back on track. There are numerous strategies to get back on track without incurring additional debt or jeopardizing your credit score.