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 a rental deposit 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.
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I wonder what interest rate Ome charges the tenant to provide a deposit?
Perhaps if the tenants actually save up and be frugal like we landlords' do in order to buy btl, then they wont have cashflow issues would they. Its also the lack of parental teaching on how to be frugal that had caused all these hoo haa on tenant not having money for deposits and we landlords get the blame all because we are hardworking and able to see the need for housing where the council did such a poor job of it causing millions of pounds of losses at the expense of the taxpayer.
I bet if they want to buy a flashy hand bag for £1500 they soon find the money then or don't care about the level of interest they pay on any card.
Compare these interest rates to what everyone will be paying on their overdrafts come mid-March, when the EU banking regulations force interest rates up to nearly 40% and many businesses rely on their overdraft credit lines periodically. So this will stifle small business growth. why are we following this EU banking rule when we shall be leaving the EU on 31 January? Why are borrowing costs this high anyway when the base interest rate is just 1.5% and if you deposit your spare cash with the bank they give you a ridiculous 0.10%? The banks are free to screw everyone. This government needs to sort them out after brexit. They continue to be robbing banksters!
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There are 2 potential issues if tenant does not provide a cash security deposit to one of the approved schemes at the start of the tenancy. 1) If these choose not to, because they would rather keep hold of their cash. How committed are they to the tenancy? Will they look after the property and respect their obligations in the same way when they know it is not their own cash that is in jeopardy at the end of the tenancy? 2) If they are unable to, why would any landlord rent to a tenant who was down to their last few pennies? Whilst that is regrettable for the tenant, if they have no resource to lay their hands on £1000 then there is a high probability at some point the rent will not get paid and everyday cleaning, maintenance and upkeep in the property will get neglected.
It's all very well labelling this as a cash flow problem, but cash flow problems mean things dont get paid for. I would argue that is also very much an affordabilty issue as well. If their bank or credit card company wont lend them a relatively small sum of money that should be largely untouched whilst borrowed (ie: lodged in a custodial scheme until they leave the property and can pay it back) then they are either at the end of their creditworthyness as they are up to their eyeballs in debt already or have a poor credit rating and can't borrow. It all amounts to the same thing.
With the current pathetic eviction process having a tenant who can't even come up with 5 weeks deposit really shows poor money management.
It can take easily 10 months to evict someone.
A tenant without any 'skin in the game' is highly unlikely to be bothered about paying rent.
I doubt any of these replacement rent deposit schemes will be successful in any Civil Recovery.
I simply don't trust such schemes.
Nothing beats having cold hard deposit cash sitting in my bank account!
At least I would only be 9 months down of rent rather than 10!
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