Are rent loans the answer to rising rent costs in Canada?

Why the need for borrowing money for rent? The average rent in Canada has increased again, according to the Rentals.ca September report. This time, the average monthly rent across the country is $2,117, with an 9.6% annual increase and a 1.8% increase over July. (How much can a landlord legally raise rent?)

With the housing and rental crises showing no signs of abating, finding a place to live can be challenging. And, the first and last month’s rent can be anywhere from $5,184 for a one-bedroom to $6,740 for a two-bedroom in Toronto. 

How do bank loans for rent work?

Now, you could get a short-term loan, which is a loan with a maximum term of two years. You can borrow any amount between $5,000 and $50,000. They’re used for emergencies like medical bills or if your car breaks down. You can get a short-term loan for a low interest rate, but a lot of these loans come through payday lenders. 

Payday loans have very high interest rates, reaching up to 50%. If you’re not careful, using these loans can send you into a debt spiral that can be incredibly difficult to climb out of. 

There’s a new option specifically for rent loans. Ontario company Nesturo launched in 2023, offering qualified borrowers a rental deposit loan with annual percentage rates (APRs) starting at 6.99%. Like all loan products, you have to qualify when you apply, says Angela O’Leary, Nesturo’s executive chair. The company uses a combination of a credit score and a proprietary NestScore, which “is a unique and comprehensive scoring system that evaluates an individual’s reliability and financial responsibility as a tenant,” according to Nesturo’s website. It includes details such as employment history, late and/or missed rental payments and debt-to-income ratio. It’s a weighted average of all of these factors.

If you qualify for Nesturo loan services, you will have a three-to-nine-month loan and the money goes directly to your landlord in place of the first and last month’s rent deposit.

O’Leary says that the Nesturo customer is someone who might have to move quickly and may not have the money saved for a rental deposit. It could be they’re relocating for work, moving closer to hospitals or schools for better medical or educational support, says O’Leary. By loaning money, she says, Nesturo can help with the housing crisis, explaining that the loan may alleviate some of the immediate financial burden of finding rent money. “It can also free up emergency funds so that people aren’t using up their savings.” However, O’Leary does clarify that using savings is always the best way to pay for first and last month’s rent.

Should you get a loan for first and last month’s rent in Canada?

Using your own money first is Elke Rubach’s preferred method. Rubach, who is the CEO of Rubach Wealth, says taking out a loan for rent should be your last recourse after exhausting all other options, including borrowing from friends, family or a line of credit. Once you’ve secured the loan, you should build the payments into your financial plan. 

“It’s hard to see people have to access these things. They probably feel desperate and alone that nobody else can help them,” she says. “Just make sure that you know how you’re going to pay it back,” she says. 

Darryl Brown, a certified financial analyst charterholder and investment planner with You&Yours Financial, says borrowing for rent is not new—it’s just updated technology. People have been borrowing money for rent using credit cards and lines of credit, and this is just an additional option for people, he says, pointing out that the new loan option can be a good thing.

Currently, the housing and rental market is competitive in Canada, and using a company like Nesturo could work for people who need to make a quick move. When done correctly, it can be a net positive, says Brown, but borrowers need to read the fine print and understand that companies like Nesturo aren’t a silver bullet. “It’s an additional source that has repayment terms, an interest rate, which includes timely payments, which includes the ability for your payment term to change.”

Rental loan fine print includes stipulations on how and when you can get out of the arrangement, so like with any document, you need to know all the information before you sign or agree to the terms, says Brown. 

“There are the same risks that happen with any kind of loan in that you fall behind,” Brown explains. “You trade one set of stresses for another. So, it’s not the preferred source for sure, but I fully recognize from a human standpoint that things are really challenging for people.” 

That means that whatever savings people may have left after the pandemic and skyrocketing prices, it may not be enough to cover a full rental deposit.

Rental loan versus borrowing from credit cards, LOCs and more

There are other options for paying your first and last, like borrowing from a line of credit with a rate of up to 10%, or credit cards that start at 20.99% APR, if you don’t have an emergency fund. Brown says that while Nesturo may advertise a 6.99% rate, not everyone will qualify for it. 

“The answer is, it depends on each person who will have to make that determination. There could be cases for instance, like domestic abuse, where it does make sense to just throw it on a cash advance credit card,” he says.

Brown does caution potential borrowers to stick with a budget when applying for a loan. He says not to apply for a place that’s out of your price range. You have to be able to not only pay back the loan, but still make the monthly rent, he says.

When asked, Nesturo said defaults can affect a borrower’s NestScore, but when it comes to evictions, the company doesn’t get involved in the contract or dispute between the landlord and tenant. 

Overall, while companies like Nesturo have a place, Brown and Rubach say that if this is the option, read the fine print, look at your budget and build the repayments into your financial plan. Rubach says, “If your [financial] model shows that you can’t, then let me state the obvious: Don’t do it.”

Read more about loans:

• How much credit card debt does the average Canadian have?
• Who should Canadians consult for debt advice?
• How much debt is normal in Canada? We break it down by age
• Can debt collectors discuss your debt with your family members?