What Is a Credit Builder Loan?

If you are thinking of taking a credit builder loan it’s important you know that it’s intended for people with little or no credit history to help them in building up their credit score. Even if you have a rich credit history but not a good score, by making your payments on time and in full, you can improve your credit score and eventually qualify for better loans with lower interest rates. Here, we will discuss everything you need to know about credit building loans and why they might be a perfect solution for you.

A credit builder loan by definition is a type that helps people build or improve their credit scores. Like any other loan, this one is also repaid over time. These payments are reported to the credit bureaus, which then help improve your credit score if you successfully paid them all.

A loan to build credit can be used for building credit from scratch or to improve an existing credit score. If you have no credit history, loans to help build credit will give you an opportunity to establish a positive payment history, which is one of the key factors in determining your credit score.

People who have a poor credit score often feel trapped in this cycle with no actual help to improve the score and that’s where this loan comes in handy. These loans are designed to help in this situation and lenders offer many credit builder loans with no credit check so anyone can apply.

If you have bad credit, taking out a loan to build credit will give you an opportunity to improve your score by demonstrating that you’re capable of making on-time payments. With bad credit, you probably also have piled up bad payment history so through this process you will build some positive history too.

And now you are probably wondering why not just take out a regular loan and suffer some higher interest rates but still get the larger amount of money you need. Well, the idea behind this type of loan is that you borrow a small amount of money you can surely pay back on time. As you do so, your credit score will improve. Deciding to just take out a loan with bad credit might not just be a bad idea but also an unachievable one. Many lenders are either hesitant or just don’t want to borrow money to a person who they think is not creditworthy.

How Does a Credit Builder Loan Work?

These loans are typically small, with terms of 12 months or less, and the payments are reported to the credit bureaus. They are thought out to give you the best of both worlds- you get the money you need but also improve your score so in the future taking out a more traditional loan should not be a that hard process.

There are some variations in requirements, but no matter the lender you choose they will typically want you to have a bank account and to be employed. Credit builder loans can be found online or through some banks and credit unions. In some cases, the lender may also require you to have a cosigner.

Once you get approved for a loan, the lender will deposit the money into a savings account or another type you chose. From this moment on, you will need to make payments usually on the monthly basis, which will, later on, be reported to the credit bureaus. Once you have paid off the loan, you will have access to the funds in the savings account, which can help you in case of an emergency.

This option is not that popular but can improve your credit score significantly. With all this being said, don’t make rash decisions, and first, make sure you understand how it all works. Don’t get stuck on the first offer you get and shop around for the best deal before you apply.

It is also important we mention there are two different types: secured and unsecured credit builder loans. A secured one requires you to put down collateral, such as a savings account, car, or whatever asset you choose, before getting the loan. An unsecured credit builder loan doesn’t require any collateral associated with it.

With either type of loan, you’ll still be able to borrow just a small amount of money, usually between $300 and $1,000.

What Can a Credit Builder Loan Do for Your Credit Score?

This loan can help you so much in relatively easy improving your credit score. It’s also a great option if you are young and have no credit history but need to make some in order to apply for a bigger loan in the future. In general, they are a good low-risk option for you as well as for lenders. The chances of you defaulting on this loan are low as the amount you can take is low as well.

How to Get a Credit Builder Loan

By taking this loan you are given the opportunity to borrow a set amount of money, which you then repay over a period of time. This shows lenders that you are a responsible borrower, and can help improve your chances of getting approved for future loans.

As we already talked about, you don’t need to have a good credit score or to put down collateral if you do not want to. All you need to do in order to qualify and later get approved is have a steady income and an open bank account. These loans are one of the easiest to get as there is no huge list of requirements or steps you must follow. Some things you can do before applying are- checking your credit report and making sure there are no mistakes made. While credit builder loans are usually given with no credit check, improving the score will give you even more options to choose from if you are for example considering some alternative to these loans.

Getting a credit builder loan can be the best way to improve your credit score. Just be sure to understand the terms and conditions of the loan, and make your payments on time. By doing this you are on a good track to an excellent score.

Who Offers Credit Builder Loans?

If you’re looking for a credit builder loan, there are a few different places you can choose from. Here are a few options to look at before deciding on anything:

• Credit unions – many credit unions offer credit builder loans to help their members in building their credit.
  
• Banks – some banks also offer it as part of their personal finance products, but be sure to check this by calling the bank or going on their website.
  
• Online lenders – they offer a huge variety of loans but there are also the ones that specialize in credit builder loans.
  
• Peer-to-peer lending platforms – these online peer-to-peer lending platforms have an option to apply for a credit builder loan as well.
  
• Finance companies – some finance companies, such as Avant, also offer credit builder loans to qualified borrowers.
  

Choosing the right lender for you will depend on a number of factors, including your credit history, current income, and financial goals. Be sure to compare offers from multiple lenders to find the one that best meets your needs.

Alternatives to Credit Builder Loans

There are few credit builder alternatives available if that’s something you are looking for. You could think about a secured credit card, which requires a deposit that acts as your credit limit. Or, you could get a cosigner on a traditional credit card or loan as this helps even if your credit is really poor. Finally, you could consider a personal loan from a peer-to-peer lending platform if you don’t like their credit-building options.

Each of these options has its own pros and cons, so be sure to do your research and weigh them out before committing to anything.

Final Thoughts

By reading this article you probably came to the same conclusion as we did- a credit builder loan is a great way to get a good credit history. By making timely payments, you are already on a way to a much better score. While there are still some risks involved, such as the possibility of defaulting on the loan, these can be minimized by choosing a reputable lender with a good offer and making sure you can afford the monthly payments. If you are still unsure if is this a good option for your situation, be sure to talk to an experienced financial advisor to get the needed guidance.