Having a positive and established credit history is essential to taking out a loan, renting an apartment, or even getting a job.
With bad credit or no credit, everyday tasks become much harder since lenders can't take a close look at your credit history.
So what to do next? A good solution is to look into a credit builder loan, which can help you build or rebuild your credit. When used correctly, this loan builds a history of positive payments and eventually generate a good credit score.
Credit builder loans are offered by local banks, credit unions, and online services. The borrowed amount is held in a secured account while you make regular payments on the loan. These payments show your potential lenders that you are serious about improving your finances and that you can be trusted with loans, credit cards, and mortgages.
Once the credit builder loan is completely paid off, the funds are released to you.
The Advantages Of Credit Builder Loans
- Credit builder loans help you build (or rebuild) your credit history.
- They can help you save money since you are making monthly payments into a secured account, which are eventually released to you.
- You receive the accrued interest in addition to your loan amount.
- Credit builder loans are a great way of helping you learn good financial habits.
- Credit builder loans prepare you to qualify for borrowing larger loans in the future.
- Qualifying for a credit builder loan usually isn't difficult since you don't need any credit history -- just sufficient income to cover your payments and (depending on the lender) some form of collateral.
The Disadvantages Of Credit Builder Loans
- Missing any payments can backfire on your goal of building your credit history and actually cause damage to your credit.
- Credit builder loans are not free. Many lenders will charge additional fees such as administrative fees and application fees.
Where To Get A Credit Builder Loan
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Local banks and credit unions: A good place to begin your search is a local bank or credit union. You can visit a local branch in person to apply or submit an application online.
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CDFIs: Community Development Financial Institutions can be found in lower-income communities to specifically assist consumers struggling with their finances.
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Nonprofit organizations: Nonprofit organizations in your community may have resources to help you build your credit, develop positive financial habits, and even help you file your taxes or reduce the amount of tax you owe.
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Online lenders: Online lenders (such as Austin, Texas-based company Self Lender) partner with FDIC-insured financial institutions to offer loans nationwide.
(Note: Before taking out a credit builder loan, make sure your lender reports to all three bureaus rather than just one or two of them in order to receive the full benefits.)
Why A Credit Builder Loan?
Because your credit score matters! If credit repair services don't align with your financial needs, a credit builder loan is an excellent alternative.
However, it is extremely important that you take the process seriously and make on-time payments to receive the full benefits.
Frequently Asked Questions
What is a credit builder loan?
Credit builder loans are specific loan products offered by banks and credit unions to help borrowers with little, no, or bad credit to build and improve their credit history. Your lender will report your payments to the three major credit bureaus: Experian, Equifax, and TransUnion, which establishes and builds your credit history.
How can I get a credit builder loan?
There are many places where you can shop around to find the right credit builder loan for you:
- Local banks and credit unions
- CDFIs (Community Development Financial Institutions)
- Nonprofit organizations
- Online lenders (such as Self Lender)
Who benefits from a credit builder loan?
Credit builder loans are best for those who have little or no credit and need to improve their credit, like recent college graduates or those who are trying to rebuild their credit after serious financial problems.
