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What is a credit builder loan?

A credit builder loan improves your credit score and requires payments into a savings account.

A credit builder loan offers a way for people with limited or poor credit history to increase their credit scores. They’re typically offered by small financial institutions and credit unions, and are generally easy to qualify for. A credit-builder loan helps you establish a credit history and can help boost your record of on-time payments, both of which can build your credit score. This can help you secure favorable terms and rates on future financing options such as mortgages, car loans and more.

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How does a credit builder loan work?

A credit-builder loan, also known as a fresh start loan or secured installment loan requires that you place the approved loan amount in a savings account. The lender holds this loan amount as collateral, in case you can’t make payments. As you make timely payments towards your credit-builder loan, your lender updates the credit bureaus. By slowly meeting your payments, your credit score increases, assuming your financial situation elsewhere is the same.

When you pay off your credit-builder loan, your lender returns the amount in your savings account to you with any interest earned. You’ll find that these loans can trend up to $1,000 with repayment terms up to two years.

Are credit building loans worth it?

Credit building loans are worth it if you have poor credit or are just starting out in building your credit history. However, like with any loan product, if you miss your payments or overspend elsewhere you’re at risk of lowering your credit score and racking up fees and interest.

Where to get a credit builder loan?

You can apply for and receive a credit builder loan through the following institutions:

  • Credit unions. These community financial institutions usually have less stringent requirements and offer lower rates than traditional banks.
  • Online lenders. Many fintech companies such as MoneyLion provide credit-builder loans up to $1,000 if you prefer a seamless online process.
  • Local banks. Smaller community banks offer credit-builder loans and have a reputation for working with poor credit borrowers or those with minimal credit history.

Alternatives to credit builder loans

If you want to build your credit and aren’t sure about credit builder loans, there are many other options you can consider.

  • Secured credit cards. These are credit cards that are similar to a credit builder loans in that they require a security deposit as collateral. The security deposit usually matches your credit limit.
  • Debit-credit card. These hybrid cards work like regular credit cards but draw funds from your checking account. Your credit card company reports these payments to the credit bureaus.
  • Credit building apps. You can consider credit-building apps such as Experian Boost and Cushion which provide credit builder loans, secured credit cards and bill reporting to help you increase your credit.

Bottom line

A credit builder loan is an option for those with poor or little credit history to build their credit score. However like with any loan, if you don’t make your payments on time you can rack up additional fees or interest as well as lower your credit score. A credit-builder loan is just one option among many ways to build your credit.

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2 Responses

    Default Gravatar
    ShashanaApril 15, 2019

    Hello! Why can’t I get a payday loan?

      AvatarFinder
      JoshuaApril 15, 2019Finder

      Hi Shashana,

      Thanks for getting in touch with Finder. I’m sorry to hear about the trouble you are having.

      The main reason that you weren’t approved for a payday loan is that you don’t meet their eligibility requirements. Thus, it would be a good practice to make sure that you’ve read the relevant T&Cs or PDS of the loan products before making a decision. Moreover, check the eligibility requirements as well and consider whether the product is right for you.

      To improve your chance of getting approved, please read our guide, “7 tips to avoid getting rejected for a personal loan.”

      Aside from tips, you can also learn on that page how you can increase your chances of approval, the factors to consider when applying for a personal loan, and others.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

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