The secret cost of borrowing a rental deposit | Ome

February 28, 2020
Press release

After researching how long it takes to save for a deposit, we have decided to look into the cost of borrowing a rental deposit. We wanted to uncover the true and secret cost of borrowing a deposit for your new home.

For most tenants the average tenancy deposits in their area are manageable. However, paying the deposit all upfront can lead to cash flow issues. For others, they can feel forced to borrow the deposit and have to stomach the additional interest on top of the deposit itself.

We looked at the extra costs of a credit card, personal loan and payday loan and found that the interest ranged between £44 to £2,794 depending on the rate and credit score over a year long term.

Credit card

Using a credit card with a low rate of interest is the most cost-effective way to borrow a rental deposit. At an average rate of 6.4% it would set you back £112 a month to pay back over 12 months, with a total of £44 in interest.

A medium rate at an average of 18.9 per cent would set you back £119 a month with £126 paid in interest, while a higher rate at 36.3 per cent would come in at a monthly cost of £128, paying £231 in interest.

Personal loan

If you have a good credit score, a personal loan at a rate 11.4 per cent would cost £115 per month with just £78 in interest, the second most affordable route to borrow a rental deposit.

An average credit score would cost you £118 a month at a rate of 16.7 per cent paying £112 in interest, but a poor credit score would cost around £122 a month, paying £163 in interest. For those with medium to poor credit scores, a credit card, while still fairly expensive, would see you pay less interest in the long run.

Payday loans

Payday loans, notorious for their high rates of interest and by far the worst route to go down when borrowing a tenancy deposit, are unfortunately the only route for some. Borrowing £1,299 and paying it back over the course of a year would see you hit with a rate of 292%, paying a hefty £341 a month and a huge lump of interest at £2,784.

Co-founder of Ome, Matthew Hooker, commented:

“For many tenants, the financial hurdle of a deposit is more of a cash flow problem than an affordability issue and as a result, many are forced to borrow the money in order to secure a rental property. This only adds to the financial stress that renting can bring and with rents continuing to climb, not only are tenants paying a large sum to a landlord each month, but also to their lender with the addition of interest. This is particularly testing for those with a poor credit score who have no choice but to borrow with some very high interest rates and of course, should they borrow for a longer-term, they will also pay more in interest. This large upfront obstacle in the way of a tenant deposit is one of the driving reasons we launched Ome in order to address the issue of cash flow for UK.”