Credit Builder Loans: Overview and How to Get Them

Credit Builder Loans:

Credit builder loans can help you build credit from scratch or rebuild good credit after bankruptcy or years of neglecting payments. 

credit builder loan

This article will focus on:

First, Credit builder loans are loans taken out specifically for establishing credit and improving a score. Usually, they’re provided by credit unions or banks. Some nonprofits may offer these loans as well.

These are unique loans because they’re not designed for you to access money. They’re simply to boost your credit score.

How Does a Credit-Builder Loan Work?

Credit-builder loans are typically offered by small financial institutions, such as credit unions and community banks.

When you get a credit-builder loan, the money you agree to borrow is deposited into a bank account held by the lender.

You’ll then make monthly principal and interest payments – which are reported to credit bureaus for a term usually around six to 24 months. When the loan is paid off, you get the money from the account.

The benefits of a credit-builder loan are twofold: You’re building a little nest egg while also building credit.

Where To Get a Credit-Builder Loan

You likely won’t find a credit-builder loan at a large national financial institution, if that’s where you do most of your banking. Instead, try these options:

Credit Unions:

Many credit unions offer credit-builder loans; search your local institutions’ websites to see your options. You’ll need to become a member of the credit union to get a loan, and you’ll qualify based on characteristics such as where you work or where you live.

To join, you’ll pay a small membership fee or donate to a partner charity.

Community Banks:

These locally owned banks may also offer credit-builder loans, and have a similar focus on financial education as credit unions. Search for a community bank near you using the Independent Community Bankers of America’s search tool.

Online Lenders:

Self Financial offers online credit-builder accounts, which are similar to credit-builder loans in that borrowers make monthly payments toward a savings account. You’ll pay a one-time fee of $9 to $15 to sign up, depending on the loan balance.

Lending Circles:

Peer groups can help each other build credit using lending circles, which offer interest-free loans usually facilitated by a community organization.

The group decides on a monthly payment and loan balance, and each member pays the same amount per month to a central fund. Every month, one member receives a loan in the agreed-upon balance.

In the meantime, monthly payments are reported to the three credit bureaus. One way to look up lending circles in your area is by using the nonprofit Mission Asset Fund’s database.

How Much Does a Credit-Builder Loan Cost?

Costs of a credit-builder loan vary depending on the lender. When looking for your loan, pay attention to:

The APR: APR, or annual percentage rate, is the amount your lender charges you to borrow the funds. An APR of less than 10% is common with credit-builder loans, but some have higher rates.

Interest Payments: Lenders offering credit-builder loans may keep some or all the interest you pay, giving you only the remaining balance at the end of the loan term.

Other Fees and Costs: Lenders may charge an application fee for the loan or charge late fees if you don’t pay on time.

The Loan Repayment Term: The longer your loan term, the more interest you’ll pay.

Maximum and Minimum Loan Limits: You don’t want to borrow too much or too little. If you borrow a larger amount of money it could take you longer to pay back, which means paying more in interest.

How Can a Credit-Builder Loan Help My Credit?

A credit-builder loan is a type of installment loan, which has fixed monthly payments. Paying off installment loans on time contributes to healthy credit scores.

In fact, payment history across all your accounts—including credit cards, student loans, auto loans, and credit-builder loans—makes up 35% of your FICO® Score*, the largest share.

Credit-builder loans help you build credit if you don’t yet have any accounts, and they can help restore credit if you have negative marks, like missed payments, on your credit report.

By making on-time payments, you’ll show lenders you can be trusted to take on other lines of credit in the future. A good credit score—one that’s 670 or higher, according to FICO’s model—can get you access to rewards credit cards or loans at more favorable interest rates.

Other Options for Rebuilding Your Credit

Getting a credit-builder loan isn’t the only way to give your credit profile a boost. You can also use one or more of these strategies to build credit:

Opt For a Secured Credit Card:

Unlike a traditional credit card, a secured credit card requires you to make a deposit, generally $200 to $2,000, which becomes your credit limit. That protects the card issuer if you can’t pay off the charges.

You can use the secured card like a traditional card, charging small amounts and paying your full balance each month. Over time, if you use the card responsibly, the bank may be willing to convert it to a regular unsecured credit card account.

Make sure the issuer reports your account activity to the credit bureaus so the card will, in fact, help you build credit.

Ask a Family Member to Add You as an Authorized User:

Authorized users on credit card accounts are not responsible for making payments, but they can still use the account. Payment history will appear on their credit reports. Not all creditors report authorized user accounts to the credit bureaus, though, so ask before being added.

Apply For a Secured Personal Loan:

A secured loan is one backed by collateral, which the lender could take possession of if you don’t repay the loan as agreed.

While a secured personal loan can help you build credit, the prospect of losing the collateral you put up—such as your car—could make this a riskier option than, say, a secured credit card that requires a small cash deposit.

Apply For an Unsecured Personal Loan:

Unsecured loans aren’t backed by collateral, so they may have higher interest rates and be harder to get than secured personal loans.

Lenders will look at your income, credit scores and other financial obligations that affect whether you can repay the loan. But like secured personal loans and other installment loans, making on-time payments can bolster your credit score.

FAQs

1. Is the Credit Builder Loan a Secured loan?

Yes. Collateral funds do not have to be provided up front however, the loan proceeds are used to secure the loan.

2. How much do I need to have on hold?

100% of the original loan amount will remain on hold for the life of the loan. Loan proceeds on hold will be made available to the member upon payoff completion.

3. Will I be given funds?

Funds will remain on hold until the loan is paid in full. Once the loan is paid off you will receive funds.

4. What is the rate?

The loan rate is 6.99% fixed.

5. Can I take advantage of loan discounts?

Yes. Relationship discounts are available for the Credit Builder loan.

6. Can I add Debt Protection coverage to the Credit Builder Loan?

Yes. Debt Protection coverage is available.

7. What amounts can I get?

The Credit Builder loan is available in amounts from $500-$2,000

8. What term is available?

The Credit Builder loan is available in terms from 12-24 months.

Bottom Line

credit builder loan

A credit-builder loan can be a great tool to build credit from scratch or improve low credit scores. Just make sure to find the right lender and understand the loan terms.

Never make a payment late or you’ll undermine your credit-improvement efforts.

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