When it comes to your finances, the most traditional method may not always be the best for you. For landlords, that might mean knowing when to finance instead of paying cash, and for tenants, it could be seeking security deposit alternatives.
This article focuses on the latter and discusses security deposit alternatives for renters. By the end of this article, you’ll be more aware of your options, the pros, and the cons.
The purpose of a security deposit in a rental
Savvy property owners often budget for maintenance expenses in their plans. Wear and tear, age-related breakdowns, and faulty appliances happen all the time. However, when it is clear that the renter is at fault, they have to pay for the repairs.
Even with a professional property management company attending to a rental, tenant damage is still highly probable. You’re most likely going to graze a wall or clog a pipe at some point. Thus, to protect their investments, most landlords request that renters pay a fixed fee called a security deposit. The property owner can easily withdraw from this fund to cover these kinds of expenses.
What are security deposit alternatives?
Security deposit alternatives is a broad term to refer to substitute options that replace a traditional deposit. Your landlord might be willing to accept several types, including surety bonds, lease insurance, and pay per damage. They each operate uniquely and are often preferred by tenants because they require a smaller financial commitment.
Types of deposit alternatives
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Surety bonds
Surety bonds are one of the most popular alternatives to traditional security deposits. One of the reasons they’re often the first option for tenants is that they’re cheaper. For instance, some companies can charge as little as 20% of the usual deposit fund.
For such a small fee, a company would act as the middleman between you and your landlord. If there’s any damage, the third party pays for it, and you can then pay back through installments.
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Rent guarantees
Rent guarantees operate similar to surety bonds. However, the tenant gets a co-signer to act as a guarantor instead of a company. In other words, if there’s any damage, this third-party signatory will step in and cover the repair costs.
This option is often more costly than the traditional surety bonds and costs up to a month’s worth of rent. Also, the qualification process is harder to pass and accessible to only a few people.
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Lease insurance
Lease insurance eliminates the need for surety bonds and other guarantors. It operates similar to standard insurance arrangements, where you pay a fixed premium per month that covers substantial costs down the line. Many landlords are open to accepting this payment method because it means less paperwork. Although, the drawback is that the fees are non-refundable.
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Pay per damage
Instead of paying a security deposit upfront and letting your landlord manage it, you can hold the money yourself. Some renters prefer to open a bank account with funds specifically to cover damages, which landlords can bill when necessary. While you might have to hold the same amount as the regular fee, you can easily dispute claims as the money never leaves your account without authorization. Although, getting a landlord to sign off on this deposit method is unlikely.
Pros and cons of alternative deposits
Pros
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Avoid large deposits
One of the most apparent benefits of alternatives is that it places the less financial burden on you. After all, the law allows landlords to charge up to two months’ rent in some states. Since you don’t have to cough up the costly security deposit at once, your bank account can afford more room to breathe.
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Lower monthly rates
Another advantage of bypassing traditional security deposits is lower monthly rates. For rental arrangements that allow tenants to pay installment fees, erasing such a commitment can be a relief.
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Ease of getting an apartment
Many prospective tenants lose out on their dream apartments because they can’t afford the security deposit. Despite the rent being within their budget, most landlords won’t sign a lease unless they can get a guarantee against damage. However, since most alternatives are more affordable, you can move into the house you want.
Cons
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Damage fees
Unfortunately, a security deposit alternative does not mean escaping damage fees. Unlike a standard insurance policy, you still have to pay for any tenant-caused damage to the property.
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Non-refundable payments
Another drawback of seeking an alternative is that they’re often not refundable. In other words, after your lease expires, you cannot recoup the excess funds you paid. On the other hand, security deposit laws ensure you get the remnants after the landlord has deducted necessary repair fees. Thus, there’s a chance it could be more costly.
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Vague laws
Since security deposits are the traditional standard, they are more regulated. There are several laws at the federal and state levels to protect both landlords and tenants. However, with other options, that might not be the case. Companies can introduce hidden clauses in the fine print, which enormously offsets the price of their services. Hence, you have to be on guard when looking for an alternative.
Conclusion
Tenant damage is often inevitable, and a security deposit helps landlords protect their investment. However, some renters find this fee outrageous and thus seek alternatives. Surety bonds, lease insurance, and pay per damage are the most common options open to tenants. They have the advantage of freeing you from large deposits and missing out on your dreams. However, they’re often less regulated. Thus, it would be best to weigh the pros and cons of your options carefully before making a choice.
