The average cost of a tenancy deposit in the UK is £1,299, and for tenants required to pay the full sum upfront, many are being forced into borrowing from a lender and absorbing the hit of additional interest, according to new research by Hamilton Fraser’s deposit alternative scheme, Ome.

The research investigated the additional costs of a credit card, personal loan and payday loan, and revealed the accumulated interest ranged between £44 and £2,794, depending on rate and credit scores over a 12-month period.

Ome found that using a credit card with a low rate of interest was the most cost-effective way to borrow a rental deposit – with an average rate of 6.4% costing borrowers £112 a month to be paid back over 12 months, with £44 in interest.

The study revealed that a medium rate at an average 18.9% would set borrowers back £119 a month with £126 paid in interest, and a higher rate at an average 36.3% would come in at a monthly cost of £128, with £231 to be paid in interest.

Ome suggested for those with a good credit score, a personal loan at a rate of 11.4% would cost £115 per month with just £78 in interest, the second most affordable route to borrow a rental deposit.

Furthermore, the research found an average credit score would cost borrowers £118 a month at a rate of 16.7% paying £112 in interest, but a poor credit score would cost around £122 a month, with £163 in interest owed. For those with medium to poor credit scores, a credit card, while still expensive, would see borrowers pay less interest in the long-term.

Ome’s study indicated the worst option to take when borrowing for a tenancy deposit, despite noting it as the only option for some borrowers, was a payday loan. The research revealed that borrowing £1,299 and paying it back over the course of a year would see an average rate hit of 292%, with £341 to be paid a month and a lump of interest at £2,794.

Ome co-founder, Matthew Hooker, suggested the financial hurdle of a deposit is ‘more of a cash flow problem than an affordability issue.’

“This only adds to the financial stress that renting can bring and with rents continuing to climb, not only are tenants paying a large sum to a landlord each month, but also to their lender with the addition of interest,” Hooker said.

“This is particularly testing for those with a poor credit score who have no choice but to borrow with some very high-interest rates and of course, should they borrow for a longer-term, they will also pay more in interest.

“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.”

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