Now, Loans for Rental Deposits Too

If you are moving to one of the bigger cities such as Mumbai and Bengaluru, finding a cheap accommodation is not easy. Rentals can be quite high too. However, as a tenant, paying high rent is not the only problem. You need to put up a big security deposit with the landlord/owner too. In Mumbai, this amount can range from Rs 1 lac to Rs 2 lacs. In Bengaluru, security deposit is 11 months rent. Clearly, these amounts are huge and need to be paid upfront. Accumulating such amounts is not easy when you are starting your career or even otherwise. What if you don’t have such amounts readily available? Or, if there is no other way to raise money from friends/family for this security deposit. A personal loan is an option. As expensive as a personal loan may be, its one of the limited available options.

A few lenders such as Bajaj Finserv and LoanTap have started offering loans for this very specific purpose. Let’s call these products Rental Deposit Loans. At the very basic level, these loans are simply another kind of personal loans.

How Is a Rental Deposit Loan Different from a Personal Loan?

The repayment structure can be different in a rental deposit loan. In a rental deposit loan, you may have to pay only the interest amount during the loan tenure. At the end of the loan tenure, you can pay back the entire principal at one go. And this is for a reason. Since security deposit is a refundable deposit and the loan tenure is linked to the tenure of the rent agreement, the expectation can be that the landlord will return the deposit amount at the end of the lease period. The tenant/borrower can use the amount to pay back the principal amount.

On the other hand, a personal loan is a regular reducing balance loan. Under a reducing balance loan, the principal outstanding goes down every month.

Let’s consider a Rs 2 lac loan (18% p.a. or 1.5% per month) for 24 months.

  1. Under rental deposit loan, you will pay Rs 3,000 per month (Rs 2 lacs X 1.5%) for the first 23 months. In the 24th month, you will pay Rs. 2,03,000 (Rs 2 lacs + Rs. 3,000).
  2. Under a personal loan, you would pay an EMI of Rs 9,984 for 24 months to close the loan.

How Much Loan Can You Get?

Bajaj Finserv offers loans up to Rs 5 lacs. Bajaj Finserv loan can cover for brokerage and advance rent too. On LoanTap, I could check loan amounts of up to Rs 4 lacs for loan tenure of 33 months. This loan is only for the security deposit.

What Is the Loan Tenure?

LoanTap matches the loan tenure with the lease tenure. As I understand, the maximum tenure is 33 months. Bajaj Finserv provide the rental deposit loan for tenure up to 36 months.

What Is the Eligibility for Such Loans?

At LoanTap, you must be salaried with a minimum income of Rs 30,000. There is no information about loan eligibility on Bajaj Finserv website.

What Is the Rate of Interest? What Are the Other Charges?

There is no reason why the rate of interest for a rental deposit loan should be any different from a personal loan. Both are unsecured loans and have similar eligibility criteria.

LoanTap charges 1.5% per month as interest. In addition to interest cost, there is a processing fee of 2-5% plus taxes. There could be prepayment penalty too. Bajaj Finserv charges prepayment of 4% of the outstanding amount for foreclosure and 2% of the prepayment amount in case of part-prepayment. LoanTap charges 4% if you close the loan before 6 months. There is no foreclosure charge after 6 months.

Note: The rate of interest and the charges will vary across lenders and will change over a period.

Other Points to Note

With Bajaj Finserv, you must deposit a copy of your rental agreement during the application process. Once the rent agreement is verified, the amount will be transferred to your bank account. There is a practical problem with this approach. The cheque details (for security amount) go on the rental agreement and you must share the cheque with the landlord when you sign the agreement. However, you will not have loan money in your account when the agreement is signed. Therefore, you will have to ask the landlord not to deposit the cheque for a few days or give him a post-dated cheque.

LoanTap directly credits the loan amount in the landlord’s bank account. Repayment must be managed by you. If the landlord refuses the return the deposit amount, it is your problem. For LoanTap, you are the borrower.

Should You Go for It?

What options do you have? If there is no other option, you must go for a loan to fund the security deposit. If you have other options, explore them.

The rental deposit loan is a very expensive loan. Remember it is a short tenure loan. The impact of processing fee of 2-5% p.a. is quite high. For Rs 2 lac loan for 2 years, the effective cost of loan goes up from 18% p.a. (1.5% per month) to 19.4% per annum.

Between a personal loan and a rental deposit loan, a personal loan is a better choice in my opinion. I assume the rate of interest and other charges is the same in both cases.

With a personal loan, the interest payout will be much lesser.

  1. In a personal loan of Rs 2 lacs for 2 years at 18% p.a., you will pay an interest of Rs 39,235 (EMI of 9,984 for 24 months).
  2. Under a rental deposit loan, you will pay total interest of Rs 72,000 (2 lacs X 1.5% X 24).

This difference is because the principal outstanding remains constant during the loan tenure in the rental deposit loan. Under the personal loan, the principal outstanding goes down every month.

At the same time, you would have to pay only Rs 3,000 per month in a rental deposit loan (and Rs 2 lacs at the end of loan tenure) while you will have to pay an EMI of Rs 9,984 under a personal loan (nothing at the end of tenure). Therefore, your cash flow position can also tilt the scales. If your cash flows are tight, you may prefer Rental deposit loan despite the loan being more expensive. If there is one thing worse than taking an expensive loan, it is defaulting on that expensive loan.

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