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What is a credit builder loan in Canada?

A credit builder loan can help you improve your credit score if you have a damaged or limited credit history.

Credit builder loans are designed to help you improve your credit score and put money aside for the future. All you need to do is make timely payments on your loan, which your lender will report to the credit bureaus. But be aware that, unlike traditional loans, you won’t be able to access your funds until you’ve paid your credit builder loan off in full. Once that happens, you’ll get a lump sum of cash that you can save or spend on whatever you want.

What is a credit builder loan?

Credit builder loans are designed to help you build your credit score by reporting all of your on-time payments to the credit bureaus. They’re usually targeted towards people with bad credit or no credit history and are typically offered by smaller financial institutions such as credit unions and private lenders.

When you sign up for a credit builder loan in Canada, you’ll agree to repay your loan amount before you get the money you borrow deposited into your bank account. This is to give your lender some security that they’ll have money to cover your loan if you default. It also allows you to get access to secured credit even if you don’t have an asset to put up against a secured loan.

Once you’re approved for a credit builder loan, you need to start making payments. Every on-time payment you make will be reported to the credit bureaus. These on-time payments should help to increase your credit score so that it’s easier for you to get more traditional forms of financing in the future. Once your loan is paid off, you’ll get access to the money you originally borrowed to spend on whatever you want.

Features of credit builder loans:

  • Low amounts. Credit builder loans usually range between $500 and $5,000.
  • Short terms. Most credit builder loans need to be paid back within a couple of months to less than two years, depending on which lender you borrow from.
  • High interest rates. You may have to pay between 10% and 30% interest to secure a credit builder loan.
  • Funds only issued when loan is paid off. You’ll typically only get access to the funds you borrow when you’ve paid off your credit builder loan in full.
  • No deposit required. Unlike secured credit cards, credit builder loans don’t require a deposit to get started (so you won’t need to dip into your savings to get one).
  • No assets required. You won’t be required to put up an asset such as your home or vehicle to secure this type of financing.

Where can I get a credit builder loan?

Credit builder loans aren’t as common as other types of financing, but you may be able to find them with the following providers:

  • Big banks. Big banks may offer some version of credit builder loans by securing your funds in an account until you’re finished making your payments. At this point, you can spend the money from your loan or keep it in your savings.
  • Credit unions. Many credit unions offer credit builder loans for a small fee. Just be aware that you’ll typically need to sign up as a member with a credit union to take advantage of any of its loan products.
  • Online lenders. Online lenders are a good place to start when you want to rebuild your credit online. You can sign up from the comfort of your own home and you’ll be able to compare interest rates to find the best deal.

What can a credit builder loan do for me?

A credit builder loan can help you take control of your finances in the following ways:

  • Helps you build or rebuild your credit. Your credit score will go up as you make on-time payments.
  • Gives you access to better rates. As your credit score goes up, you’re more likely to be eligible for competitive interest rates on future traditional loans.
  • Teaches you how to budget for payments. Taking out a credit builder loan can help you learn how to budget and practice good savings habits.
  • Gives you the chance to grow your savings. You’ll get access to a lump sum of cash when you make your final payment, which can then be deposited into your savings.

When should I take out a credit builder loan?

You should only take out a credit builder loan if you feel like this could help you to rebuild your credit and set aside some much-needed savings. You might benefit from this type of loan if you meet any of the following criteria:

How much will I pay for a secured savings loan or credit builder loan?

The amount you’ll pay for this type of loan is a point of contention among many borrowers since savings and credit repair loans charge interest and additional fees on any amount you borrow. With interest rates over 20% APR, this means you could end up paying $100 more per year on a $500 loan.

While these loans do cost more than what you would pay to simply transfer your loan payments directly into a savings account, they can be a good solution for people who have trouble staying accountable to their finances without external support.

And while you won’t save money upfront with these types of loans, you may be able to save money indirectly. This is because rebuilding your credit can help you get more favourable rates on future loans. You may also be more likely to keep your savings in a secured account over the long term if this is set up for you in advance.

How do I manage a credit builder loan?

You can easily manage a credit builder loan in Canada with the following tips:

  • Make a budget. Start by making a budget to figure out how much you can afford to spend on loan payments each month.
  • Borrow a small amount. Borrow a small amount to keep your loan payments manageable and cut down on how much interest you have to pay.
  • Pick a shorter term. Look for the shortest term available with monthly payments you can afford in order to pay your credit builder loan off quickly.
  • Search for low interest rates. Look for low interest rates before you sign up so that your monthly payments stay affordable and you can put more down on your principal.
  • Set up direct debit. Set up an automatic withdrawal from your bank account so that your bills get paid automatically.
  • Make sure you maintain your payments. Keep up with your payments every month to ensure that only on-time payments get reported to the credit bureaus.
  • Keep an eye on your credit score. Get a copy of your credit score before you start the loan process so you’ll know how far you’ve come when you pay off your loan.

Benefits and what to watch out for


  • Builds credit. A credit builder loan will help build your credit so that you can get more competitive interest rates on future traditional financing. All of your on-time payments will be reported to the credit bureau, so your credit should start to improve as you pay down your loan.
  • Easy to pay off. Since credit builder loans are for small amounts, they’re usually fairly easy to pay off.
  • Short repayment time. You can usually pay off a credit builder loan in less than a year, depending on how much you borrow.
  • No collateral required. You won’t have to secure your loan with an asset or a cash deposit.
  • Lump sum of cash. You’ll be able to access a lump sum of cash without needing to worry about paying back your debt as soon as you make your final payment.
  • Enhance your savings. Since you won’t have access to your money until your loan is paid off, there’s no chance you can spend it ahead of schedule.
  • Improve your discipline. If you typically have trouble saving money, it could help to have your savings locked away where you can’t reach them.
  • Open up other financing options. You may be able to use the amount you borrow as collateral for other financing options (like a secured credit card).
  • Get a better credit mix. Your credit score will go up if you have a good mix of loans, credit cards and other forms of credit.
  • Bad credit doesn’t matter. You may be able to get approved for a savings loan or credit repair loan even if you have bad credit.

What to watch out for

  • No money upfront. You won’t get the money you borrow until you pay your loan off in full. This means these loans aren’t a suitable form of financing if you need access to money right away.
  • Inaccessible funds. You won’t be able to access your funds until your loan is paid off, so these loans aren’t a good option if you need emergency cash.
  • High rates. Many lenders will charge high rates and fees to issue this type of loan. You’ll typically pay interest rates between 12% and 45% APR, which can add up to hundreds or even thousands of dollars over time.
  • Additional fees. You could get stuck paying extra fees like set-up or administrative fees on top of your original loan amount.
  • Missed payments are also reported. Your credit score could potentially go down if you miss payments since these will also be reported to the credit bureaus.
  • Small loan amounts. You won’t be able to borrow very much money with a credit builder loan so it’s not a suitable way to save large amounts of cash.
  • Not a quick fix. There’s no guarantee that the payments you make will bring your credit score up significantly, especially if you’re behind on your payments for other debts.
  • Low borrowing amounts. You’ll usually only be able to borrow a small amount for these types of loans, particularly if your credit isn’t in good shape.

How can a credit repair loan help me improve my credit score?

This type of loan can help you to improve your credit score because your on-time payments will typically be reported to the credit bureau as soon as you make them. This means that your score will go up by a small fraction every time you put money onto your loan.

The only way your credit score won’t go up while you’re paying off a savings or credit repair loan is if you have other outstanding debts that are being left unpaid. For example, if you’re missing credit card payments or mortgage payments because you’re paying off your savings loan, then your credit will continue to go down.

How to apply for credit builder loans

You can apply for a credit builder loan in Canada by following these steps with most lenders:

Application process

  1. Visit your lender’s online website to fill in an online application. This should take only a couple of minutes.
  2. Input personal information such as your full name, date of birth, address, phone number and email.
  3. Provide financial details such as your bank name and transit number.

Loan eligibility requirements

To qualify for a credit builder loan in Canada, you may need to meet the following eligibility requirements:

  • You must be at least 18 years old or the age of majority in your province or territory.
  • You’ll need to be a Canadian citizen or a permanent resident with a valid Canadian address and two valid pieces of identification.
  • You must be able to demonstrate that you can pay off your loan by showing pay stubs, tax statements and other financial documents.
  • You’ll usually need to have a bank account to apply for a loan online.

Required documents and information

  • Government-issued ID. You may have to show proof of ID, such as your driver’s licence or passport.
  • Proof of address. You’ll likely need to show that you have a permanent address by providing a utility or phone bill.
  • Proof of income. You may be required to show documents like pay stubs or letters of employment to prove that you have a steady job.
  • Bank statements. It’s possible that you’ll need to show your bank statements to demonstrate that you have money coming in to cover your payments.

What other options are available for bad credit financing?

If you can’t afford to wait for your credit builder loan to mature to improve your credit or get financing, you have other options. These include:

  • Secured credit cards. Secured credit cards work just like regular credit cards but the money on them is secured by a deposit you make in advance. These cards can be useful to build up your credit score, but they won’t give you access to “credit” in the sense that the money you spend comes out of your deposit.
  • Short-term loans. Commonly known as payday loans, these loans let you access small amounts of money to get over a financial hump. Just keep in mind that these loans come with extremely high interest rates and should be avoided wherever more affordable options exist.
  • Bad credit personal loans. Bad credit lenders look beyond your credit history to your income and financial status when determining whether you can afford repayments. You can usually access both installment loans and single payment loans with bad credit lenders and borrow money with or without collateral.
  • Apply for a low-interest credit card. It might make more sense to get a low-interest credit card so that more of your payment goes towards your principal. Compare your low-interest credit card options here.
  • Get a co-signer on your loan. You might benefit from having a co-signer with a good credit score help you to secure financing at affordable rates.
  • Credit counselling. You might like to use a credit counselling service in your city to look into how you can build up your credit score without having to take out another loan.
  • Borrowing from loved ones. Asking for a no-interest loan from family or friends could be a good option to clear out your debt if you don’t owe very much

Like other forms of credit, these options require you to pay back your debts on time through monthly, bi-weekly or weekly repayments. If you make a late payment or miss one, it can negatively affect your score. Make sure you can afford to take on extra debt before you agree to a loan, otherwise you could find yourself in a worse financial state than when you started.

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Bottom line

Credit builder loans can be a useful way to rebuild your credit and get back on track with your finances. Every on-time payment you make is reported to the credit bureaus to help increase your credit score. The main downside of these loans is that you can’t access the funds you borrow until you make your last payment. It can also be difficult to find a reputable lender offering credit builder loans with competitive interest rates.

Frequently asked questions

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