Security Deposit Alternatives: Money Savers Or Money Drainers?

Posted by Staff Reporter ( on Aug 26, 2015 09:30 PM EDT
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CHICAGO, IL - JUNE 22: One million dollars in $100 dollar bills is displayed at the Money Museum in the Federal Reserve Bank of Chicago June 22, 2011 in Chicago, Illinois. Established in 1914 the Chicago Fed is one of 12 regional Reserve banks that make up the nation's central bank which helps formulate the nation's monetary policy. Today the central bank said the economy will expand slower than previously thought, marking the second time this year that Fed officials lowered their forecasts for growth. (Photo : Scott Olson/Getty Images)

You are planning to a rent place and in the process of sealing the deal with the landlord, security deposit comes up.

While you know that you have to pony up some amount of money upfront for application fee, broker's fee, or moving cost if you hire help, most landlords demand security deposit in case the new tenants cause any damage or issue to the rental.

But what if the landlord offers you an alternative to the traditional deposit? Surety bond is growing in popularity and is a cheaper option than a security deposit. But is this the best option if you think long term?

Let Trulia help you decide:

What is a surety bond?

This new tool allows a renter to pay a one-time fee instead of paying a security deposit. A renter who doesn't have enough money to pay for a deposit could close a rental deal by going for a bond which costs less money.

"The primary purpose of this is to reduce a deposit that is unaffordable ... or for a tenant that has documentation issues or credit issues where an owner is looking for an unusually high deposit," says Bruce Ailion, an Atlanta based real estate agent.

With bonds, the money goes to the bond company instead of the landlord. The bond company then becomes responsible for compensating the landlord for the value of security deposit he would have collected and in some instances even covers for damages incurred during your stay.

What you need to know?

Before deciding which option to choose, it is important for you to understand the difference between a security deposit and the alternative surety bond.

With a surety bond, since it is a fee and not a deposit, you will not be getting your money back after the lease ends regardless if you caused any damage or left the place in good condition. It also typically only covers a certain amount of time which may not be the wisest decision of you plan to rent the place for an extended period.

A security deposit on the other hand lets you take your money back in part or in full; depending on the state of the place when you leave it.

The bottom line is, a surety bond may seem like a better option for a renter, but this security deposit alternative isn't necessarily the smartest choice.

Proceed with caution

Going for a surety bond could subject your credit at risk according to Crystal Stranger of 1st Tax.

"I would think that the bond companies would be much more likely to file against your credit or go into a collection process if there is damage," she says. "Having a third party involved just complicates everything much more than dealing directly with a landlord or property manager." 

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