Rental Deposit Alternative Scheme Loans
A new rental deposit alternative scheme claims that some renters have to resort to high-interest payday lenders in order to afford a deposit.
Hamilton Fraser’s Ome scheme says that while many tenants can afford the typical UK deposit of £1,299 – either out of their own income or savings, or by borrowing from friends or family – some have to resort to more aggressive loan sources.
“They are forced to borrow the money from a lender and stomach the additional interest on top of the deposit itself” says Orme.
The service looked at the additional costs of a credit card, personal loan and payday loan and found that the interest ranged between £44 to £2,794 depending on rate and credit score over a one year term.
Of those three options, using a credit card with a low rate of interest is the most cost-effective way to borrow for the rental deposit alternative scheme and at an average rate of 6.4 per cent it would cost tenants £112 a month to pay back over 12 months, with £44 in interest.
A medium rate at an average of 18.9 per cent would set them 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.
Prospective tenants with a good credit score could secure a personal loan at a rate 11.4 per cent; that would cost £115 per month with £78 in interest.
An average credit score would cost tenants £118 a month at a rate of 16.7 per cent but a poor credit score would cost around £122 a month. For those with medium to poor credit scores, a credit card, while still fairly expensive, would see them pay less interest in the long run.
Payday loans have become notorious for their high rates of interest.
Unsurprisingly, therefore, a tenant borrowing £1,299 and paying it back over the course of a year could face a rate of 292 per cent, paying a hefty £341 a month and a huge lump of interest at £2,784.
“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 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 the UK” claims the service’s founder, Matthew Hooker.