When Should you Use a Payday Loan for a Rent Deposit?

You might be tempted to take out a payday loan when you do not have the cash on hand to meet the move-in requirements of your next house or apartment. After all, payday loans are the easiest loans to obtain when you have questionable or bad credit. However, this is one of the most dangerous financial moves you could make.

It may be true that a payday lender will not smash your kneecaps if you fail to pay like a loan shark might, but they charge double the interest rate that a loan shark would charge. A loan shark typically charges around 200% APR, while a payday lender charges an average of 391% APR.

Therefore, you should never utilize a payday loan to cover the security deposit on rental housing. If you do so, you are ensuring that you will be unable to keep up with both your continuing rent payments and your payday loan payments. You would eventually default on one or most likely, both of your financial obligations.

The same can be said for some of the more intermediate term usurious lenders, of which tribal lenders have quickly become the most savvy. These lenders also charge interest rates that routinely are 3-5 times the legal limit for most states, yet hide behind a claimed tribal sovereignty that they believe allows them to bypass state usury laws. West Virginia is one of the first states to win a case against one of the largest tribal lenders, which does business as Western Sky Financial as well as several other business names.

Even consumer finance companies can charge high interest rates of 25-30% APR. These are also difficult to repay, frequently leaving you broke and in debt.

Instead of turning to one of these predatory payday loan style products or high interest loans, you should instead look to more traditional lenders. Traditional lenders almost always have better terms.

You may be reluctant to apply with one of the big banks. After all, these tend to be more selective on loan approvals as they prefer applicants with credit ratings above a 680.

However, you may be able to gain approval on an acceptable loan through either a credit union or a smaller community-based bank. Both can be good options, since they often have better terms on their loans. They may have more relaxed credit requirements. Additionally, they may have some flexibility if you are close but just shy of meeting one of their lending criteria. Finally, if anything goes wrong, a community bank or credit union are both more likely to be able to work out alternative repayment arrangements than a large commercial bank would be.

You may feel that a loan is the only way that you can get into a new apartment. However, consider whether you would ever be able to afford to repay that loan. Furthermore, it may be unnecessary if you qualify for one of the subsidized rental apartment communities near where you live. This is always preferable to taking on more debt.

Make sure that you discover all of the opportunities in your city or county to assist with rent payments and security deposits. A local program just might keep you out of debt and in a safe and affordable apartment.