A good credit score typically means banks and lenders
consider you less risky while offering you a loan. And
though there are lenders who provide
loans to people with bad credit, improving your credit score will only make you a more
attractive borrower and open up more funding options for
you.
There are various good ways to improve your credit score,
and they can take their own sweet time to make an impact.
You can choose a suitable option depending on your financial
goal and how much you want to raise your credit score. If
you wish to start building credit or rebuild your credit
without a credit card, you can consider taking out a Credit
Builder Loan. These loans are different from traditional
ones but have proved beneficial in building credit,
especially for people with no credit or poor credit.
If this loan type has grabbed your attention and you'd like
to learn more, let's look at what credit builder loans are,
how they help you build credit, and if they are suitable for
you or not.
What Is A Credit Builder Loan?
Credit builder loans are called by various names, including
fresh-start and starting-over loans. Regardless of what
they're called, their purpose has always been to help
borrowers build their credit.
A credit-builder loan is a specially designed loan with some
of the
advantages of installment loans
that can help you make fixed repayments and create a
positive credit history. The critical difference between an
installment loan and a credit builder loan is the time of
loan disbursement. Unlike any standard installment loan, you
won't receive your loan amount upfront with a credit builder
loan. The idea of credit builder loans is to help you build
a history of regular payments, so you get access to the
funds at the end of the loan's term only and only after
you've paid fixed payments toward it over several months to
a lender. Hence, you can use these loans as a way not just
to build credit but also as a money-saving scheme.
Key Features Of Credit Builder Loans
How Do Credit Building Loans Work?
It must be evident that credit builder loans differ from
many other loans. When you plan to take out a
credit-building loan, your clear objective should be
establishing a credit score or improving your current one.
The chances are that there might be some savings that you
probably didn't expect while improving your credit at the
end of the
loan term.
Now, if you're wondering how this happens, read on to
understand the step-by-step process of using these loans to
build credit:
Your first step will be to identify a suitable credit
builder loan lender for you. Selecting the
right online lending company
won't be challenging as it's much easier to identify the
possible lenders and compare their loan terms online. Once
you've found the right lender, apply for a credit-builder
loan and get approved.
When you decide the loan amount, generally in increments of
$300 to $1000 as per the Consumer Financial Protection
Bureau, your lender will create a savings account or a
certificate of deposit where your funds will be deposited.
You won't have access to the money until you pay the loan in
full by the end of a specified date.
The usual loan term of a credit builder loan is over six to
twenty-four months. You'll have to make regular monthly
payments with a portion of your
principal amount
and interest until the loan is completely paid off during
this term. This makes repaying a credit building loan more
manageable and convenient.
Each monthly repayment you make will be reported to all
three major credit bureaus: Experian, TransUnion, and
Equifax. The information of every payment you make will show
up on your credit report. Since your
payment history affects your credit score
largely, you'll be able to see your credit improve by merely
building a solid payment history.
Your lender will release your borrowed funds soon after
you've paid off your credit-builder loan in full at the end
of your loan term. The funds might get directly deposited in
your account by the lender, and you'll be free to use them
however you want. Any additional savings you see by taking
out a credit-builder loan is a bonus!
It's essential to note that these steps may vary from lender
to lender and state to state. Check the detailed credit
building loan procedure with the chosen lender before
signing the loan agreement.
What Are Their Pros And Cons?
A loan that works for someone else may not be the right
solution for you. So, here are a few essential pros and cons
of credit-building loans that you can consider before you
decide to use them for building credit from scratch or
improving low credit scores:
Pros
-
Every on-time payment on your credit builder loan is
reported to the major credit bureaus to assist you in
building credit over the loan term.
-
Most credit builder loan lenders consider only your income
for approval, making the loans easier to qualify whether
you have bad credit or no credit.
-
These loans work as a great tool to save money as you land
up with a lump sum of money in your bank account at the
end of your selected term.
Cons
-
Making repayments for a credit builder loan may feel like
a burden when you need cash immediately and would require
taking out a
quick personal loan
instead.
-
The interest and fees that the lender charges may not
always be refundable, making the loan costlier for you.
-
If you have poor credit, missing payments on a credit
builder loan could further reduce your credit score.
How Much Does A Credit Builder Loan Cost?
The cost of your loan can be determined by various factors
like
annual percentage rate
(APR), application or origination fees, late fees, etc. Your
lender decides the interest rate and origination fee you
will be charged according to the governing law and
jurisdiction. You can avoid any late fees by not missing
your repayment due dates.
Since you get the principal loan amount once you've finished
making all the fixed payments over several months, anything
you pay over the principal and is not refundable becomes the
actual borrowing cost of a credit builder loan. If you're
fortunate and your lender deposits your loan balance in an
interest-earning account, you might be able to reduce your
overall cost of the loan.
How Can I Get A Credit-Builder Loan?
Suppose you have no credit history, poor credit, or want to
improve your credit score. In that case, you can find a
credit builder loan at small financial institutions, such as
local credit unions, community banks, and a few online
lenders. Credit builder loan requirements are more or less
similar to most
bad credit loans. You don't need a good credit score to qualify for a
credit-building loan, as they are fundamentally designed for
people who intend to build and rebuild their credit. This
could mean that no credit checks are required to get these
loans. With that in mind, you'll need to meet some essential
loan eligibility criteria to qualify for a credit builder
loan.
Common Requirements Of Credit Builder Loans
18 Years of Age or Older
Employment information
Social Security number
Proof of income such as Pay stubs, tax returns
Balances in checking and savings account
References
Is A Credit Builder Loan A Good Idea?
A credit builder loan is a unique financial tool that might
work if you can keep up with the regular payments. Your
payment history makes up 35% of your credit score;
therefore, these loans target improving a solid payment
history to build good credit. If you can make on-time
payments, a credit building loan might be the perfect
option. Conversely, you might see no improvement or end up
hurting your credit even more if several late or missed
payments are reported to credit bureaus.
If you don't find a credit builder loan a good fit, you can
explore alternative credit options that could help you build
a credit history. Credit building options include secured
credit cards and unsecured and secured personal loans. Yes,
secured credit cards are available, which require you to
deposit a refundable amount almost of the value of your
credit limit. Like a credit builder loan, you may see your credit
improve if you make on-time payments. Some lenders will let
you switch your secured card to a non-secured card after a
certain amount of on-time payments, which means you'll get
your deposit back.
Secured and unsecured personal loans can help you get funds
instantly and build a good payment history at the same time.
With flexible repayment terms, you might not even feel the
burden of paying back the loan on time. And while some
lenders don't check your credit score when you apply for
installment loans to build credit, you need not worry about hurting your credit while
borrowing a loan.
Ultimately, before choosing a credit builder loan or one of
its alternatives, it's wise to analyze your financial
situation and do in-depth research about all the options.