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What Is A Credit Builder Loan?

credit builder loan

If you have bad credit or no credit and you want to improve your credit score, one great option is to apply for a credit builder loan. If you have a poor credit rating or are just getting started building credit, your options for improving your credit score are going to be severely limited. That’s why a credit builder loan can be so beneficial.

What Is A Credit Builder Loan?

A credit builder loan is a type of loan that almost anyone can take out, even if you have no credit, very little credit, or poor credit. In fact, the entire purpose of a credit builder loan is to help people increase their credit score so they can achieve some of their larger life goals.

So, if you’re a recent college graduate with only your student loans on your credit report, a credit builder loan can allow you to diversify your credit streams and show future lenders that you can handle different types of loans. If you have a bad credit history that includes things like debt in collections or a home foreclosure, a credit builder loan can be the first step to rebuilding your credit.

Even if you already have a good credit score, a credit builder loan can add another loan to your credit report, which improves the “credit mix” portion of your score. There are a limited number of ways that you can improve this portion of your score and a credit builder loan is an easy and affordable option.

How do Credit Builder Loans Work?

In order to get a credit builder loan, first check online. There are new financial companies, like Self Lender, that offer quick approval for credit builder loans. In fact, on their website, it says “no credit score required.” This might sound surprising, but not when you learn how they work. In many ways, a credit build loan is very similar to a savings account. Let me explain: The way it works is that you essentially build up savings to give a “loan” to yourself. You might agree to send in $100 a month, every month, for 12 months, to your credit builder loan company. Then, at the end of the 12 months, provided you made all of your payments on time, you will receive your $1,200 back minus any fees your financial institution charges you.

This method is successful because your lender doesn’t have to worry about you defaulting on your loan and not paying them back because you’re building up your own savings account essentially. You benefit because every month you pay on time, your financial institution reports positively to the credit bureaus.

If you’d rather apply for a credit builder loan at a bank, the financial institutions that typically offer them are credit unions rather than the larger banks. If you’re a member of a credit union already, contact them to see if they offer a credit builder loan. If you’re not a member of a credit union or not interested in becoming a member of one, try searching online for financial companies that specifically offer credit building loans.

Benefits and Drawbacks of Credit Builder Loans

According to recent research, getting a credit builder loan and making all of your payments on time can raise your credit score by 35 points.

Not only will you see your score improve, but credit builder loans can also help you get into a habit of making good financial decisions. It encourages you to make your payments on time and to take action to improve your credit rating.

While getting a credit builder loan is a good idea for many people, there are some drawbacks. Credit builder loans typically come with fees. For example, Self Lender charges $76 in fees. This might be worth it for someone who has no other options to build their credit, but it could be steep for someone with good credit who simply wants to raise their credit score a few points. So, you have to weigh your options and talk to a few credit unions or online companies to find out which credit builder loan has a fee structure that works best for your own needs.

Additionally, it’s important to mention that if you miss a payment, your financial institution will have to report negatively about you to the credit bureaus. This basically will have a reverse impact of credit building, making it extremely important that you never miss a payment.

Other Ways To Build Your Credit

If you’re not sure whether or not a credit builder loan is right for you, be sure to look into other ways to build your credit. Some popular options include getting a secured credit card, which gives you a low credit limit but can help you get disciplined with your finances.

You can also research secured personal loans and unsecured personal loans. Regardless of what you choose, what’s important is that you take the initiative to improve your credit so that you can have a healthy financial life.

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