Renting an Apartment with a Loan: When It Makes Sense and When It Doesn't
Renting an apartment can be quite a time-consuming undertaking, especially if you have clear requirements for what the rental home should be like. Even if you find a suitable rental apartment, however, a new problem may arise: how to finance the costs associated with renting an apartment?
It is hardly surprising to discover that obtaining the perfect rental apartment requires, for example, two months' rent paid in advance, to which a security deposit is added. This way, the initial expense can quickly grow to even a couple of thousand euros. The financial question becomes even more complicated when the new rental apartment also requires the purchase of some new items, such as a new mattress.
Most of us, however, do not have the means to take such a large sum from our pockets, which is why a small loan is often considered. Since a small loan of this magnitude can be taken without collateral and the loan process is quite fast, the costs associated with renting an apartment are often financed with such a loan without much further thought.
However, the financial services comparison portal Financer.com reminds apartment renters that even if the loan obligation seems small at first, it can become a significant loan burden that should not be taken so lightly. What is more, it is possible that renting an apartment with a loan is not as good an idea as you thought.
Consider the total cost of a small loan
As shown in the small loan comparison published on Financer.com, several well-known Estonian lenders offer small loans with interest starting from 9-10% per year. Since the actual loan interest depends on the borrower's creditworthiness, the interest rate can also be significantly higher, sometimes even around 20%.
If you take a small loan of 2000 euros for 2 years at the lowest interest rate, you would pay approximately 350 euros in interest, but if the interest is already 20%, this amount is doubled, or in other words, by the end of the loan period you have to pay almost half of the original amount on top of it.
The cost of credit is also affected by other costs associated with the loan agreement, such as contract fees and monthly administration fees.
You should certainly not make your loan decision based solely on the interest rate, as "10% per year" does not actually give a clear picture of how much you will eventually have to pay in total. However, each lender provides a detailed overview of the total cost of credit before concluding the loan agreement, and it is this overview that tells you exactly what the final cost is.
Before you decide to rent an apartment using a small loan, you should definitely consider whether you are prepared for the total cost of credit and whether it is acceptable for you to pay the stated final amount.
Renting an apartment with a loan means significantly higher monthly obligations
In addition to considering the total cost of the loan agreement in the long term, you should also think about your monthly expenses. Renting an apartment with a small loan means that your monthly obligations are immediately significantly higher: in addition to rent and other housing costs, you have to pay the borrowed loan every month.
Depending on the amount and period, this payment can vary greatly in size, but according to the example above (2000 euros for 2 years), the loan payment can be close to 100 euros even at the lowest interest rate. If the apartment rent is already 500 euros, with winter utility bills and a small loan payment combined, your rental home could cost over 700 euros. 100 euros is a large sum of money, so before taking a small loan, you should seriously consider: do you have 100 euros left over each month right now so that you can even afford such a loan obligation? The amount could also be higher if the offered interest rate is higher or the desired period is shorter.
Although the loan payment could be reduced by using a longer period, this may not be a suitable option for many people either, as a rental apartment is usually not a very long-term living arrangement. According to the same example, the monthly payment can be under 50 euros with a 5-year loan period, but are you sure that you will live in the same rental apartment for 5 years? You must consider the possibility that in a year or two you may need to move, which means you are again facing the dilemma of financing rental costs and at the same time paying off the small loan you took out for the old apartment.
A small loan obligation is not a joke. Even if the amount does not exceed 1000 euros, you must seriously consider your existing expenses. The rental apartment you found may indeed seem perfect, but as they say, there are plenty of fish in the sea: do not rush into the first offer if the costs associated with renting the apartment are beyond your means. Instead, be patient, consider your creditworthiness and you will certainly find an apartment that suits you in every way, without creating unnecessary additional obligations.
However, if you still want to borrow additional money for renting an apartment, use the helpful calculators and comparison tables on Financer.com, through which you can easily find the loan offers with the best terms in Estonia.
