How to Get a Credit Builder Loan
If you hope to get approved for loans and credit cards, a good credit score is important. It can also help you land low rates and favorable terms.
But what if you have little or no credit history? That’s where a credit builder loan comes in. It can help you establish credit and save some money at the same time.
What Is a Credit Builder Loan?
In general, credit builder loans are personal loans for small amounts, usually of $1,000 or less.
These loans come with repayment terms ranging from six to 24 months. They’re designed as short-term loans to help borrowers who need to build or improve their credit. You can find them at some smaller financial institutions like community banks and credit unions.
Who Benefits From Credit Builder Loans?
A credit builder loan may be a good option if you don’t have a credit history. This might be because you’re young and haven’t had a chance to establish a credit score. Or maybe you’ve used credit in the past but not recently so there’s not enough recent information for a score to be created.
You might also be an immigrant who has never applied for or used credit in the U.S. No matter what your situation is, you may use credit builder loans to earn a good credit score. With solid credit, you can borrow money with attractive rates and terms.
How Credit Builder Loans Work
Credit builder loans work differently than traditional loans. If you take one out, the money you borrow will be set aside for you in a secured savings account or a certificate of deposit (CD) while you repay the loan.
As you make payments, the lender will report your payment activity to the credit bureaus, allowing you to build your credit. Once you’ve paid it back completely with interest, you’ll receive the funds. Not only will a credit builder loan demonstrate your ability to make regular, timely payments, it will also give you a chance to save money.
AmONE can help you find a personal loan that works best with your credit score and financial situation. See how our partner lenders can help you find a loan no matter what your situation is.
What to Look For When Choosing a Loan to Build Your Credit
Not all loans geared to borrowers with poor credit or those that help you build credit are created equal. That’s why you should do your research, shop around, and explore all of the options available to you. When you do so, consider these factors.
Interest rates
The interest rate you receive can have a significant impact on the overall cost of your loan. If you notice a lender charges sky-high interest rates in the three digits, you may want to look elsewhere. Otherwise, you may pay thousands of extra dollars in interest.
Fees
Many fees such as origination fees and late fees are legitimate. But if a lender charges upfront fees like advance fees, don’t work with them. You shouldn’t pay anything out-of-pocket until you get approved.
Lender reputation
If you can’t find a lot of information about the lender or they lack positive reviews or a good rating on the Better Business Bureau (BBB), they may not be reputable. Go with a lender who has a physical address, ample information on their website, and is registered in your state.
Transparency
A respectable lender will be straightforward about their rates and fees. If you can’t find any information about what they charge, you may get ripped off and pay much more than you have to. Opt for a lender with clear pricing.
In addition to credit builder loans, you may want to look into loans for poor credit or no credit. These products can also help you build credit so that you can qualify for better financing options in the future. They can also be useful if you need fast cash as you’ll receive the funds right away instead of at the end of your repayment term.
Dos and Don’ts of Credit Builder Loans
When you apply for or use a credit builder loan, keep the following dos and don’ts in mind.
Dos
Do Comparison Shop: Don’t choose the first credit builder loan you find. Shop around and compare options so you can find the ideal one for your unique situation.
Do Keep Up With Your Payments: A credit builder loan only makes sense if you make all your payments on time. Set up calendar reminders or enroll in automatic payments to ensure you never miss a payment.
Do Calculate the Fees: Some credit builder loans charge high fees like administrative fees and late fees. To avoid unwanted financial surprises, do the math and figure out how much you’ll pay in fees.
Do Read the Fine Print: Before you sign on the dotted line, find out how much money you’ll get back if you repay your loan. Some lenders will issue the money you borrow plus some of the interest and minus the fees. Others won’t refund the interest.
Do Determine How You’ll Use the Money: Have a game plan for what you’ll do with the money you borrow. You might want to consolidate your debt, boost your emergency fund, or save for a major purchase.
Don’ts
Don’t Borrow More Than You Can Afford: The larger the loan, the higher monthly payment you’ll have. Choose a loan amount you can comfortably pay back.
Don’t Forget to Make Your Payments: Even if you miss a single payment, your credit score will take a hit. Be sure to make every payment on time or you’ll defeat the purpose of a credit builder loan.
Don’t Pay Off the Loan Early: If you repay your credit builder loan early, you’ll cut your positive payment history short. With a credit builder loan, it’s far better to stick to your set payment schedule and term.
Don’t Expect Results Right Away: It usually takes some time to establish or improve credit. Be patient and don’t get discouraged if you don’t get a positive credit score immediately.
Don’t Use a Credit Builder Loan in an Emergency: If you need quick cash to cover an emergency expense, a credit builder loan isn’t a good choice. Unlike with a traditional unsecured loan, you’ll have to wait until the end of your repayment term to get your money.
