Can you take out a loan for rent?

The average cost of rent in 2024 is $1,983 which is 3.6% higher than last year. With rent continuing to rise, you may be facing temporary financial strain and the prospect of taking out a personal loan to cover rent can be tempting, but is generally not advised.

There are many things to keep in mind if you're weighing this decision, including whether you have other options, if you're likely to continue to struggle to pay rent, and the cost of the loan.

Should you take out a loan for rent?

Generally speaking, it's not a good idea to go into debt to pay your rent. If you're unable to make rent for one month, ask yourself if this is a one-off need or a recurring situation. If it's a recurring situation, it may be better to find a longer-term solution, like a lower-cost rental or taking on part-time work. Loans can be expensive, and while one might provide immediate relief, going forward you'll have to cover not only rent but monthly loan payments.

However, if your overall financial picture is healthy, and a one-time emergency has made covering this month's rent impossible, taking out a loan may be the right choice.

What to consider before taking out a loan for rent

Consider the cost of the loan and whether you can afford it for the duration of the repayment term.

When you take out a loan, you're not just repaying the principal, or the actual loan amount. You're also paying back interest and any fees the lender charges. Interest can be a significant amount of money. The average personal loan interest rate for a two-year loan is 12.59% as of February 2024, according to the Federal Reserve, but will likely be much higher if you don't have good credit.

You may also pay an origination fee, which is usually a percentage of the loan amount that is taken out from the loan proceeds, and ranges from less than 1% to 12%.

The interest rate you qualify for is often determined by your credit score. If you have a good credit score (a FICO score of 670+), you're more likely to qualify for a competitive interest rate. But if you have bad credit (a FICO score below 580), you may not qualify for a loan at all, or you might have a higher interest rate - meaning you'd pay more for the same loan amount over time.

Average interest rates by credit score

Carefully review your budget and the monthly payment you can afford to ensure the extra bill won't overwhelm you. Then, prequalify with several lenders to get an estimate of rates available to you. You can often prequalify without hurting your credit (lenders perform a soft credit check). But when you formally apply for a loan, the lender will conduct a hard pull, which could temporarily ding your credit score.

Types of loans to consider

Unsecured loans

Best if: You have good credit and don't want to put an asset up as collateral

Unsecured loans aren't secured by collateral - instead, lenders determine how likely you are to repay your loan based on your credit history, employment information, income, existing debt, and other factors. They then decide how large of a loan you qualify for and what interest rate to offer.

A personal loan is a type of installment loan with a fixed interest rate that is often unsecured. Repayment terms generally range from two to seven years, and loan amounts are available from around $1,000 to over $50,000, depending on the lender and what you qualify for. Personal loans can fund within days, and annual percentage rates (APRs) with most lenders cap out at 36%.

Secured loans

Best if: You have collateral and can't get an unsecured loan or want a lower interest rate

Secured loans are loans secured by something you own, often a house, a car, or a financial asset like a certificate of deposit (CD). A loan secured by collateral may allow you to qualify for a loan amount or interest rate you otherwise could not. On the negative side, if you default on a secured loan, the lender can take the asset you used to secure it.

Some lenders offer secured personal loans; and if you have sufficient equity in your car, you may qualify for cash-out auto refinancing.

Emergency loans

Best if: You need a small amount that you can repay within weeks

An emergency loan is a type of loan used to cover an emergency expense. Loans marketed as emergency loans are often small-dollar loans (less than $1,000), don't require a credit check, and offer same-day funding but may be due within weeks. Credit card cash advances, title loans, cash apps, and payday loans are some examples of an emergency loan.

Some personal loans that fund the same day you apply are also types of emergency loans. But these typically do require a credit check, have much lower rates than short-term loans, and are often repaid over a period of years.

Pros and cons

Pros

• You'll pay your rent: Using a loan to pay your rent can help you avoid eviction or marring a perfect rental payment history. Note that it's important to choose a lender that can get you money before your rent is late.
• Your rental history won't be impacted by a missed payment: Your rental payment history won't be dinged by a missed or late rent payment.

Cons

• Another monthly expense: Unless you can pay off this new loan in full, you'll add a new payment to your monthly payments which will reduce your monthly buying power.
• Interest and fees: You'll end up paying more than the actual cost of your rent due to interest and fees.
• Increases your debt: Increasing the amounts you owe on your credit report could have a negative impact on your score. Plus, new debt will increase your debt-to-income ratio which could make it harder to qualify for a loan in the future.
• It may be unsustainable: Relying on a loan to pay your rent can be an unsustainable practice financially. Instead, look at your monthly budget and try to lower costs elsewhere.

How to apply for a personal loan for rent

1. Check your credit report: Check your credit report for errors that might be hurting it. You can request a free credit report from AnnualCreditReport.com. If you notice discrepancies, file a dispute with the appropriate bureau.
2. Check your credit score: If you don't know your FICO score, find out so you can see which lenders you're eligible to apply with. Many banks and credit cards offer a free credit tool with your account which includes your score.
3. Prequalify and compare loan terms: Most lenders, including banks, credit unions, and online lenders, offer an online prequalification process to give you an idea of the rates you may receive. Prequalify with a variety of lenders to compare interest rates, fees, payment amounts, and how many months you'll be repaying the loan. Note that prequalification does not hurt your credit, and is not an offer of credit.
4. Complete your application: Once you've determined the best option, complete a full loan application. After you submit it, the lender will conduct a hard credit inquiry which could temporarily reduce your credit score. Expect to provide a government ID, proof of income, proof of employment, and other documentation, such as bank statements.
5. Sign the paperwork and receive your funds: If you're approved, the lender will send you the closing paperwork. Read it closely to make sure you understand the fine print. Then sign and wait for the funds to be disbursed. Many lenders offer very quick disbursement timelines, some as soon as the same day you apply.

Alternatives

If a loan for rent isn't the right option for you, here are some other ways you may be able to deal with the situation:

• Speak with your landlord: You may be surprised at how flexible your landlord is willing to be, especially if you're a good tenant with a track record of on-time rent payments. Talk to your landlord and see if they can work with you - they may be willing to accept half now and half in a couple of weeks, or you may be able to come to some other agreement.
• Ask for help: If you have friends or family that can lend you the money, ask if they would be willing to do so. Write out an agreement as to how and when you'll pay them back - and stick to it.
• Move out or get a roommate: If your rent is just too high, it may be best to cut that cost. If doable, get a roommate to split the rent with you. Or move out and find a less expensive place where you won't struggle.
• Boost your income: Find a side hustle to help you cover these expenses. Freelance work, gig work, or a part-time job are all ways to increase your income and help you cover your monthly bills.
• Get nonprofit help: Look for rent assistance programs in your area. Many cities have nonprofit organizations or government programs that can help you with this exact issue, such as HUD Section 8 assistance. Also, check out 211, an online source with local assistance information.
• Take an emergency withdrawal from your 401(k): Per the SECURE 2.0 Act of 2022, you can withdraw up to $1,000 per year for emergency expenses without paying a 10% penalty.
• Borrow from your 401(k): If you need more than $1,000, consider a 401(k) loan. You can borrow up to 50% of your vested account balance or $50,000, whichever is less, and have five years to pay it back (as long as you stay with your current employer). There's no credit check, but you could face taxes and penalties if you can't repay the loan. Check with your plan sponsor for more information.

FAQ

Can I get a loan for rent if I'm currently unemployed?

You may be able to qualify for a loan for rent even if you don’t have a job at the moment. A good credit score or applying with a cosigner with good credit will help. Lenders may want to see proof of other forms of income, such as unemployment benefits.

What types of rental expenses can I cover with a loan for rent?

If you use a personal loan to pay for rent, you can use the funds for a wide range of expenses as long as the lender approves the loan’s purpose. For instance, using personal loan funds for expenses like new clothes may be acceptable, whereas using a personal loan to pay for education or business expenses is often not. 

Are there any tax implications associated with a loan for rent?

Generally speaking, you won’t pay taxes on a loan you take out. Personal loans, for example, are not considered income and thus are not taxed. 

How quickly can I receive the funds from a loan for rent?

How quickly you can receive funds depends on the lender and your application. Some lenders offer very quick disbursement timelines, such as the same day or the next business day after you're approved. Others may take up to five business days.