Best Credit Builder Loans
You can get approved easily for credit builder loans because you won't get access to the borrowed money until you've already paid off the loan. Self Lender, Fig Loans and Republic Bank are some of the options for the best credit builder loans.
Working on building your credit score is one of the most important things you can do for your finances. Lenders use your credit score to determine whether you’re a trustworthy borrower, so a bad credit score could mean you won’t be able to get a personal loan, credit card, car loan, mortgage, or other financial product. Your credit score also determines the interest rate you’ll pay when you are approved for a loan.
Others — such as landlords — also use your credit score to assess whether you’re trustworthy enough to do business with, so a bad credit score can impact people even if they don’t need a loan or line of credit.
Unfortunately, it’s often a challenge to earn a good credit score for one simple reason: you cannot improve your credit if you don’t have credit. That’s because your credit score is determined based on your payment history, the amount of credit you use, the types of credit you have, and the average age of your credit — all the information found on your credit report.
You’ll need to obtain an initial loan or line of credit so you can build your credit history and show you can repay larger loan amounts responsibly. That’s where credit builder loans come into play.
In this guide:
- What Are Credit Builder Loans?
- Lenders That Offer Credit Builder Loans
- The Risks of Credit Builder Loans
- Tips for Using Credit Builder loans to Improve Your Credit
- Other Ways to Improve Your Credit
What Are Credit Builder Loans?
Credit builder loans are loans with an easy approval process that are designed specifically for people who need to build credit because they don’t yet have a strong credit history or because they have had problems with their credit in the past.
In most cases, when you take out a credit builder loan, you borrow between $300 and $1,000 — but the catch is that you don’t actually get access to the funds until you’ve already paid the full loan amount back.
The money you borrow is put into a savings account for you. You’ll make monthly payments based on your interest rate and amount borrowed, and the lender will report your monthly payments to the three credit bureaus — Equifax, Experian, and TransUnion. Once you’ve paid back the entire borrowed amount, you’ll be given the funds that the lender deposited into your savings account.
In other cases, you’ll be given the borrowed funds right away — but need to have the borrowed amount of money invested in a savings account that serves as a security deposit for the credit builder loan. In rare cases, you can also get a loan and access the funds right away, without putting money into an account that serves as collateral. These types of loans are usually for very small amounts, and the loan rate is often higher.
Because you pay back the loan before you gain access to the money — or because your loan is secured by cash in your savings account — there’s no risk to the lender giving you a credit builder loan. These loans encourage you to save money while building credit since you end up with a nest egg in your bank account at the end once you’ve paid back the loan amount and get access to your borrowed funds.
Lenders That Offer Credit Builder Loans
Many financial institutions offer credit builder loans, including banks, credit unions, and online lenders. These loans can have different interest rates; different loan amounts; different fees; and different loan payment rules. It’s important to compare your options to make sure you find an affordable loan that reports to the credit reporting agencies and that charges minimal interest and few or no fees.
at Self Lender’s secure website
Build credit responsibly with Self Lender
- Get a savings plan that helps you build credit
- No upfront deposit required
- No credit score required
Some of your options for lenders to consider include the following.
- 1st Financial Credit Union: Borrow between $300 and $1,000 for a one-year repayment term. The annual percentage rate is 12%, but 50% of the interest is refunded back with on-time payments.
- Self Lender: You can obtain a 12- or 24-month loan, the proceeds of which are deposited into a certificate of deposit (CD) held in your name. When the loan is paid in full, you can access the funds. Monthly payments will range between $25 and $150 depending upon the loan amount. You’ll also pay an account activation fee.
- Fig Loans: With FigLoans, you’ll pay a one-time account opening fee. Your money will be sent to a third-party bank that holds the funds as you make payments over 12 months. Your payments are reported to the major credit bureaus and, after you’ve made all your payments, your funds will be released to you. Interest rates are below 4%, but all borrowers must pay a one-time non-refundable fee to open an account.
- Republic Bank: You can borrow between $500 and $1,500 over a 12-, 18-, or 24-month loan term. Loan funds are put into a CD that earns interest. Once you’ve repaid your loan, you can either withdraw the money from the CD or leave it invested. Monthly payments are as low as $22.22, and the APR varies depending upon borrowed amount and loan payment term. There’s a $10 processing fee charged.
The Risks of Credit Builder Loans
Credit building loans have undeniable advantages, in that they can help you to develop a positive payment history when you might otherwise be unable to do so. Even so, there are risks associated with these loans too. Here are some of the biggest issues you’ll face.
- You could hurt your credit if you don’t pay on time: The point of a credit builder loan is to improve your credit score, but this will backfire if you fail to make on-time payments or if you miss your payment due date altogether. You should not take out a credit builder loan unless you are confident that you’re ready to pay your loan when it is due.
- You could end up paying high fees: Some credit builder loans charge application fees. If you do not pay your bill by the due date, you will likely also need to pay a late fee. These fees could add significant costs.
- You may pay interest on money you don’t yet have access to: In most cases, the interest rates on credit builder loans are under 10%. But, that’s not always the case. And, paying any interest on money that you cannot access until the loan is repaid can be frustrating because you may feel as though it is a waste of money.
You can mitigate these risks by making a budget that factors in your monthly payments before borrowing, and by shopping around for a lender that offers the most affordable loans possible. Some lenders will even refund the interest you pay as long as you pay back the loan on time.
Tips for Using Credit Builder loans to Improve Your Credit
As mentioned above, credit builder loans can help your credit – but they could also hurt it if you don’t make payments on time. If you’re taking out a credit builder loan to try to boost your score, these tips can help to ensure your efforts are successful:
- Monitor your credit report to keep tabs on progress: If you check your credit once a month as you pay off your credit builder loan, you can make sure your positive payment history is being properly recorded. You can also check your credit score regularly to see that it’s climbing. This will help you to stay motivated.
- Pay your credit builder loan on time, every time: It’s imperative that you are never late when you’re paying your credit builder loan as this late payment could cause your score to plummet – especially since you don’t have much of a positive credit history to offset it.
- Pay off your loan in full by the balance due: You’ll also need to make sure you’ve budgeted enough to pay the full amount of the loan by the repayment deadline.
Other Ways to Improve Your Credit
While credit builder loans are one option to try to improve your credit, there are also other things that you should do to help raise your credit score. This includes:
- Applying for a secured credit card: Secured credit cards work differently from credit builder loans. These cards give you a revolving line of credit, so you can borrow up to your credit limit, pay it off, and then charge more. With a secured card, you will usually put money equal to your credit limit in a special security deposit account with the creditor to secure or guarantee the loan. Your record of charges and on-time payments will be reported to the major credit bureaus. And, in some cases, your secured card can eventually turn into an unsecured card with responsible borrowing behavior.
- Becoming an authorized user on someone else’s credit card: If you have someone in your life with good credit, they could help you to boost your score by adding you as an authorized user to one of their cards. This card would then show up on your credit report, even though you didn’t have to qualify for it with your own credit. You’d get the benefit of the positive payment history and the lengthy period of time the card has been open, which should boost your score.
- Avoid borrowing too much: While you need to use credit to build credit, you don’t ever want to max out credit cards as this will adversely affect the credit utilization component of your credit score. A lower credit utilization ratio results in a better score because it shows you aren’t maxing out your cards and are behaving responsibly. You also don’t want to apply for too many new loans or credit cards all at once, as this results in too many inquiries on your credit report — which will also lower your score.
Bottom Line: Credit Builder Loans Can Help Boost Your Score — But Pick the Right One
When you are looking to improve your credit score, credit builder loans are an affordable way to do it. Don’t forget to also consider other options such as applying for a secured credit card so you have a mix of different kinds of credit. Make sure you shop around to find the most affordable credit builder loan when you’ve decided that taking out this type of loan is the right way to improve your score.
Author: Christy Rakoczy
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