A security deposit is an amount of money that's paid to secure the use of property or services. You're most likely to hear the term used in reference to leasing or renting an apartment, though there are other situations where a security deposit may be required.
Security deposits, sometimes called “damage deposits,” can be refundable or nonrefundable, meaning you may or may not be able to get this money back. Before handing over a security deposit, it helps to know when and why you might be asked to pay one.
Definition and Examples of Security Deposit
The broad definition of a security deposit is money you pay to someone else as part of an agreement to use property or services. A more specific security deposit definition is used when you're talking about rental properties.
According to the American Bar Association, a security deposit is defined as “money to protect the landlord in case the tenant damages the property or fails to pay rent.” When you rent or lease an apartment, the landlord can ask for a security deposit before you move in. Depending on where you live and local landlord-tenant laws, this can be capped at one to two months' rent.
Security deposits give landlords a measure of financial reassurance in the event that you break the lease, have to be evicted, or damage the property. If your lease contract allows it, the landlord can keep your deposit to cover any financial losses or damage they incur as a result of your actions.
Renting a place to live isn't the only time you might be asked to pay a security deposit, however. You may also have to pay a security deposit for:
- Secured credit cards
- Cellphone services
- Cable TV and internet services
- Utility services
- Tuition and other higher-education expenses
- Car rentals
- Vacation rentals
- Moving-truck rentals
Whether you're required to pay a security deposit in any of these situations can depend on the company's policies as well as your credit score. Company policy can also dictate when a security deposit may or may not be returned to you.
Security deposits typically must be held in escrow until your contract with a service provider ends, although state laws can vary on where this money must be kept.
How a Security Deposit Works
A security deposit is usually required to be paid before access to property or services is provided. So if you're moving into a new apartment, for example, you may need to pay the security deposit in full when you sign the lease. Or if you're heading off to college, a tuition deposit may be due before classes start.
Security deposits for rental agreements are typically covered by landlord-tenant laws at the state and/or local level. These laws can dictate:
- How much a landlord is allowed to charge for a security deposit
- When security deposits must be paid
- Where this money must be held
- Under what circumstances a security deposit can be returned and the time frame for doing so
- When a landlord can keep a tenant's security deposit
For example, if you move out of an apartment and leave behind stained carpets or damaged fixtures, your landlord may be able to keep some or all of your security deposit to pay for cleaning and repairs. Or if you break the lease and move out early, you may forfeit your deposit to cover any remaining rent payments due.
Landlord-tenant laws can also specify what resources you have as a renter to reclaim your deposit. For instance, you may be able to file a civil lawsuit in small claims court if you believe your landlord is holding back your deposit unlawfully.
Your landlord may require a separate security deposit to cover any potential pet-related damage if you have pets.
Security deposits also can be used to recoup financial losses in other situations. If you stop paying your electric bill or cellphone bill, for example, your service provider can apply the deposit to your balance. Or if you rent a car or moving van and damage it, the security deposit may be used to pay for repairs.
Do I Need to Pay a Security Deposit?
In most cases, if you're renting an apartment or another place to live, the landlord will ask for a security deposit. However, it's possible you may be able to negotiate an alternative agreement if you don't have the money to pay a large deposit upfront. For example, you may be able to spread the deposit out over the first three months of your lease term.
Whether you need to pay a security deposit for utility and cellphone services, a vacation rental, or a moving truck or car rental can depend on the service provider and your credit score. If you previously had service with a utility company, for example, they may waive a security deposit if you always paid on time in the past. You may need to provide a letter of credit to have a security deposit waived in this way.
If you're considering a secured credit card, compare the fees and interest rate you may pay if you carry a balance from month to month.
A security deposit is usually part of opening a secured credit card account. These cards require a cash deposit for opening, which typically serves as your credit limit. Secured credit cards can be useful for establishing or rebuilding credit by paying on time and keeping your balances low. Depending on the card, the deposit may be refundable.
- Security deposits are upfront payments you make as part of an agreement for accessing property or services.
- When renting property, security deposits are usually spelled out as part of your lease agreement, which is, in turn, covered by landlord-tenant laws.
- Security deposits may be refundable or nonrefundable, depending on the terms of the agreement you have with a service provider or landlord.
- If you feel a landlord is withholding your security deposit unfairly, you may be able to sue in civil court to have it returned.