Can you get a loan for renting a house?

Rental values of a house are determined based on several factors such as high demand, limited supply of rented properties, proximity of the property to bustling business districts and upcoming infrastructure project in the vicinity. One of the main concerns of tenants living in metro cities in India is the skyrocketing rental costs, and the hefty security deposits charged by some landlords. For an individual earning a limited monthly salary, managing the high rent along with other household costs can be financially challenging. Some banks and financial institutions in India offer what is known as rental deposit loan. In this guide, we will discuss the benefits of a rental deposit loan and how it helps tenants in renting a house. 

What is a rental deposit loan?

Rental deposit loans are a type of unsecured loans offered by some lending institutions, which are available for those renting a house. Typically, tenants moving to metro cities have to bear huge renting costs, including hefty deposits paid to the landlords. The advance rent payments may go beyond two months, up to six to 10 months in some cities. The rental deposit loans are specially designed to meet these expenses and provide financial support to home seekers.  Rental deposit loans are available in the range of Rs 1 to Rs 5 lakh and an interest of around 1.5-3% is levied. 

Why should a prospective tenant opt for a rental deposit loan?

Immediate financial assistance: Moving into a rented home, especially if it is in another city, can be an expensive affair. Opting for a loan to fund these expenses can serve as a good financial support for renters. This reduces the burden on one’s savings and helps the individual maintain liquidity of funds to meet other important expenses. 

No collateral required: The rental deposit loan is a type of unsecured loan and there is no need for a security against this loan (such as jewellery, property, etc.).

Quick loan disbursal: The process of applying for rental deposit loans has been made online by most lenders. Moreover, it involves minimum paperwork and quick processing with a day or two owing to the considerably smaller loan amount. 

Who will benefit from a rental deposit loan?

Availing a rental deposit loan may be beneficial for certain groups of individuals such as students moving to another city for pursuing education. Students or even young working professionals are likely to have limited savings and thus a higher need for funds. These loans primarily cover rental deposits paid while renting a house. However, they may be designed to cover other associated expenses such as advance rent, brokerage charges, moving and relocation costs, cost of furnishings, etc. In generally, opting for a rental deposit loan may be good choice for anyone relocating to a metro city or an area where the upfront rental costs tend to be higher.  

Rental deposit loan vs personal loans

A personal loan is the most common type of loan availed by borrowers to meet their financial needs. It is issued at a fixed rate and without any collateral or security. Rental deposit loans are similar to personal loans as these are also unsecured loans, but they may be more beneficial for tenants and help them meet their huge rental expenses. 

We discuss how rental deposit loans differ from personal loans:

Purpose: Rental deposit loans are specifically designed to pay the rental costs incurred by tenants while personal loans may be used for meeting various financial requirements, including rent deposits. Moreover, rental deposit loans are ideal for those having upfront rental expenses to pay while personal loans are more suitable for people with higher financial needs and can manage regular EMI payments. 

Tenure: Rental deposit loans are short-term loans designed to meet the immediate expenses of moving into a rental home such as security deposits, advance rent payments, brokerage fee, etc. The tenure typically ranges from 11 months to 33 months. On the other hand, personal loans may be for a longer tenure of over 60 months (five years) or above. 

Loan amount: The rental deposit loan amount is usually between Rs 1 lakh to Rs 5 lakh, based on the rental agreement tenure duration of 11 months to 33 months (3 years). Personal loans, on the other hand, can be availed for an amount as low as Rs 10,000 and as high as Rs 50 lakh. 

Interest and repayment structure: The interest levied on the rental deposit loan is usually a fixed rate of around 1.5% to 3%. The tenant may have to pay only the interest component during the rental agreement tenure. The principal can be repaid as a lump sum at end of the tenure. However, in a personal loan, the EMI paid by the borrower covers both the principal and interest component. Thus, the interest burden is lower compared to fixed rate loans.

What are the alternatives to rental deposit loans?

While availing a rental deposit loan is a practical solution to manage the potential rental costs of a home seeker. However, if one is not comfortable going for a loan, there are alternative methods to bear these rental deposit costs:

Pay rent on credit: The method of paying rent through credit card is quite popular and there are many online platforms offering this facility. In this method, the tenant can make an electronic transfer from their credit card account to their landlords’ bank account. This facility is beneficial as renters can pay their expenses while on the go and get offers like reward points, cashback, etc.

Borrowing from family/friends: For some individuals, borrowing from family or friends may seem a better option to meet their immediate financial needs as it does not involve any interest or credit check. So, one has immediate access to funds. However, it may have its drawbacks and a decision should be made after assessing the impact it may have in terms of communication, relationship and repayment plan. 

Housing.com News Viewpoint

Rising upfront costs of renting a home is a reality in most Indian cities. Rental deposit loans may be a convenient option for most renters as it gives the same benefits as offered by a personal loan. That is, opting for a rental deposit loan will help prevent one’s savings from draining out due to the high rental expenses. However, these loans may have their downsides such as high interest cost and higher EMIs due to the shorter loan tenure. At the same time, if one has other ongoing EMIs, availing another loan can add to the financial burden. Hence, a decision has to be made after careful financial planning. 

Click to read about availing a rental deposit loan in India

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