Taking out a personal loan for rent: What to know

Imagine this: You're sitting at your kitchen table, going over your bills, and the picture is a little less than rosy. It’s a scenario playing out in apartments across the country, where the average rent has climbed to $1,638 per month, according to Apartments.com.

So yes, budgets are stretched thin today. And then there’s the fact that life has a way of throwing curveballs when you least expect them – whether it’s a sudden employment change, a medical emergency, or just the steady beat of inflation. Suddenly you could realize that you might not be able to cover your monthly apartment payment.

If you're in this situation and wondering whether a personal loan might help you stay in your home, you're not alone – many people weigh the same possibility. Taking the time to understand your options could be the smartest move you make.

And here’s the good news: There are more solutions than you might think.

Key takeaways:

• Personal loans – both secured and unsecured – can help you cover rent payments and housing expenses
• Personal loans can help build credit through on-time payments, but missed payments and hard credit checks can lower your credit score
• Adding loan payments increases your debt-to-income (DTI) ratio, which can affect your financial situation
• Give it careful consideration before you take out a personal loan, as amassing additional debt should be a last resort and requires confidence in your ability to repay 

Can you use personal loans as emergency loans for rent?

In a word: yes. But taking out a personal loan is no rubber-stamp process – it typically requires a credit check, and you must also meet certain income requirements.

There two types of personal loans: secured and unsecured. Let’s explore what they are, the differences between them, and which one could be right for you.

Secured personal loans

It’s important to know the basics of a secured loan if you’re exploring this option to pay for your housing expenses. To put it succinctly, it means you must offer some type of collateral to back the value of the loan. In other words, if you want to borrow $10,000, you may need to put up your car, for example, as a way to guarantee to the lender that you’ll pay it back.

A secured loan may offer a lower interest rate than an unsecured loan, but it also comes with a substantial downside: the lender can keep your collateral – the car, in this case – if you miss too many payments and default on the loan. This guarantee makes secured loans a solid option for individuals with a lower credit score.

Unsecured personal loans

Unlike secured loans, unsecured personal loans do not require collateral. However, lenders tend to be more stringent when it comes to approving these arrangements, meaning they often prefer to work with people who have higher credit scores and income.

Also worth noting: Interest rates may be higher for unsecured personal loans, as there is no collateral to cushion the financial risk for the lender.

Pros and cons of using a personal loan to pay rent

Now that you have this background of the two different types of loans, let’s explore the possibilities of using a personal loan to pay your rent. Here are some of the primary factors to consider:

Pros of using a personal loan

• You can receive the money quickly – indeed, Rocket Loans^SM offers same-day funding. This means you can make your rent payment on time, which will reduce your stress. However, these quick-turnaround loans can come with high interest rates and substantial lending fees, so keep that in mind when you shop for them.
• A lower credit score requirement (typically for a secured loan) means people with less-than-perfect credit can likely qualify.
• Relatedly, you can improve your credit rating if you make your payments on time.
• Monthly payments for the loan may be more affordable than using a credit card (an option that some turn to when they’re short of funds).
• In the long run, a personal loan may help you improve your credit score.

Cons of using a personal loan

• Setting up a monthly payment plan means you’ll be carrying debt until it’s paid off.
• You could amass more debt, causing deeper financial stress in the future.
• Taking out a personal loan could lead to a temporary credit score drop, as lenders conduct a hard credit check to determine your credit worthiness.
• And speaking of your credit score: If you miss a payment (or are late in making one), your credit score could be dinged.
• If you take out a secured loan, you risk losing your collateral if you can’t keep up with the payments.
• Personal loans include financing fees and other ancillary costs, which increase the total cost of borrowing. These include origination fees, interest, late payment fees, application fees, and more.

Questions to consider when exploring a personal loan

While a personal loan might help you pay your bills, this is not a financial decision you should take lightly. Give it more careful consideration than just weighing the pros and cons. Given the other costs and potential impact, using a personal loan to pay monthly rent obligations should be the last resort and could, in truth, just be a short-term solution to a larger problem.

Is a personal loan a temporary fix?

Ask yourself if you’re taking out the loan because of a temporary situation – maybe you lost a job or are out of work for an illness. These challenges are typically not permanent, so you’ll likely have greater financial stability when you find a new job or are able to work again.

However, if you’re constantly unable to pay rent, you may find that a personal loan actually causes more debt and financial instability. If this is your situation, you might want to look into other options, such as finding a second job or exploring more affordable housing options.

Will you be able to repay your personal loan quickly?

Something to keep in mind is that borrowers must begin making payments on their personal loans quickly. Each loan (and lender) may have different terms, but borrowers must feel confident that they can pay back their loan. Every late payment you make could have negative effects on your credit rating, which could haunt you down the road.

Can you afford to take on more debt?

Once you start thinking about taking out a personal loan to pay for your rent, consider this fundamental question: Can you afford this new debt? There may be a temporary – and totally legitimate – reason you can’t afford your rent. But if things get so tight that you can’t pay your rent, how will you be able to pay back a loan?

Before you sign on the dotted line, make sure you have some concrete strategies to ensure you can make your monthly loan payments on time – options include setting up automatic payments or creating a strict budget, among others.

It's also crucial to understand how a personal loan will affect your debt-to-income ratio (DTI). This number – created based on your monthly debt payments compared to your monthly income – goes up every time you take on new debt. Lenders look at your DTI when you apply for loans down the road, so a higher ratio could hurt your chances of getting approved for a car loan or mortgage in the future. Note: Financial experts generally recommend keeping your DTI below 28%, so factor that in before adding another monthly payment to the mix.

Questions To Help You Decide If You Should Take Out A Personal Loan

By and large, using a personal loan for rent should be a last resort. But in some cases, it may be the appropriate course of action for an interim solution to avoid eviction.

With the pros and cons in mind, you might still wonder when it makes sense to take out a personal loan to pay rent. Reflecting on the questions below may provide clarity on whether it’s the right option for your circumstances.

Is A Personal Loan A Temporary Fix?

If you’re between jobs or you incur unexpected costs like emergency medical bills, a loan may be a useful option for covering a couple months of rent while you get back on your feet. However, if being short on rent seems to be a recurring issue, a loan may only be a temporary solution.

Will You Be Able To Repay Your Personal Loan Quickly?

If you’re unsure whether you’ll be able to repay your loan on time, it may not be your best option. Failure to repay your personal loan in a timely manner can negatively impact your credit, and you could encounter penalty fees.

Can You Afford To Take On More Debt?

As a general rule-of-thumb, your debt-to-income ratio (DTI) should be no more than 28% if part of that debt includes rent payments. If your DTI is already above 28%, or taking out a loan for rent would push your DTI to this level, an alternative may be better for your financial wellness.

Alternatives to using personal loans as rental assistance

If you go through your options and decide using a personal loan to pay your rent isn’t ideal, there are other choices you can consider:

• Consider talking to your landlord and explaining your financial situation. They might be willing to work out a financial arrangement that could be mutually beneficial.
• Explore rental assistance programs, such vouchers or public housing. Resources available such as the Department of Housing and Urban Development (HUD) can help you find affordable places to live, which would make it unnecessary to take out a loan in the first place.
• Be aware that there are other loan options, such as emergency loans and payday loans, but understand that these loans are considered predatory. (That’s a scary word, right?) Here’s what it means: “Predatory loans” can trap borrowers in cycles of debt through extremely high interest rates, hidden fees, and unfair terms. While they might seem like a quick solution when you're in a financial emergency, they typically cost far more than advertised and can make your situation much worse. How? They can charge exorbitant interest rates (up to 400%!) and require full repayment within an unreasonably brief amount of time.
• To be sure you understand your rights as a tenant, check out the Consumer Financial Protection Bureau (CFPB) and explore their role in helping consumers find ways to keep their finances under control. Along those lines, it doesn’t hurt to know how to find lawyers in your area.

FAQ: Taking out a personal loan for help pay your rent

If you’re still unsure about whether you should take out a personal loan for rent payments, you’re not alone. We answered a few questions people frequently ask about using personal loans for rent.

Should I get a personal loan to pay rent?

This may seem like hedging, but it’s true: it depends on your circumstances. If you're in a temporary bind and you have a solid plan to pay back the loan, it could help you avoid eviction or late fees. However, keep in mind that you will be making monthly loan payments on top of monthly rent payments for your apartment, which is a situation you might well want to avoid.

How can I get a loan for rent?

You can get a personal loan for help pay for your rental obligations, whether it’s to pay rent or put down a security deposit. Check out this article’s section on secured vs. unsecured loans to decide which is a better option for you.

Is it a good idea to use a personal loan for rent payments?

Using a personal loan for rent can offer relief for a short period of time, but taking on more debt can increase your risk of negative financial consequences in the future. If all of these issues are raising red flags in your mind, you might want to consider looking into other ways to acquire the funds needed to pay rent before deciding to take out a personal loan.

The bottom line: Consider all the options before using a personal loan to pay rent

Facing a rent shortfall can feel overwhelming, but remember that you’re already taking the most important step by thoroughly researching the possibilities. Whether you decide to take out a personal loan or pursue another alternative, the key is making an informed decision that aligns with your specific situation and long-term financial goals.

With careful planning, open communication with your landlord, and a clear strategy for moving forward, you can navigate this bump in the road. Many people have faced similar challenges and emerged with stronger financial foundations – you can, too. Weigh your options, and remember that seeking help isn't a sign of weakness – it’s a smart financial move that shows you're taking control of your future.

Don’t hesitate to contact Rocket Loans as you move forward here!