In today’s economy, having a good credit score is essential. For many people, having a high credit score is necessary in order to be approved for a loan, get a better interest rate on loans, and even gain access to better insurance options. A credit builder loan may be the best option for you whether you are building first-time credit or rebuilding credit. 

What are Credit Builder Loans?

Credit builder loans are loans that allow you to improve your credit score. A credit builder loan is not the same as a typical loan. With a standard loan, you can receive the money you borrowed upfront and pay it back over time.

Credit builder loan requires fixed payments to a lender, who then gives you the loan amount. Credit builder loans do not demand an excellent credit score, but you must have a stable income.

These kinds of loans can help people with “credit invisible” get on the credit score radar and can be an excellent option for credit newbies.

Continue reading through this article to learn more about credit builder loans and how to use them to establish or restore credit.

How does a Credit Builder Loan work?

If your credit-builder loan application is approved, you can expect the following:

• Your lender set-asides the money – According to the Consumer Financial Protection Bureau, your lender will open a savings account or a certificate of deposit (CD) with the loan amount—typically $300 to $10,000. The loan may earn interest depending on the account and the lender.
• You make monthly payments – You will pay back the loan in installments – with interest, generally for six to 120 months.
• Your lender will report your payments to the credit bureaus – Every month, your lender will submit your payment history to at least 1 of the major credit reporting agencies.
• You get access to the money – Your lender will release the funds to you if you have made all of your payments on time after the loan term has ended.

Benefits of Credit Builder Loans

• Customers have the chance to gradually and over time increase their credit score with the help of these loans.
• These loans can help people who need to borrow money but do not have a good credit history.
• People who want to borrow money but don’t want to pay high-interest rates may find credit builder loans a good option because of their low-interest rates and flexible terms.
• Credit builder loan approval is easier when compared to other lending products such as credit cards, personal loans, and other traditional loans.

How can Credit Builder Loans be used to build/rebuild credit?

A credit builder loan is an installment loan, which means that you pay the same amount each month. It helps you build credit by:

• Adding a new line of credit to your credit report. It will signal to other lenders that you are now able to make your payments on time.
• Adding diversity to your credit report. Most tools used to build or rebuild credit are revolving credit cards. A credit builder loan will add an installment loan.

Making all of your payments on time demonstrates that you can manage credit accounts properly.

It will improve your credit (all other things being equal), making it easier to qualify for better credit cards and loan arrangements in the long run.

Related Question about Credit Builder Loans:

Where to find a Credit Builder Loan?

• Online lenders – An online search might bring up lenders who provide credit-builder loans. However, not all lenders are licensed in all states, so double-check. Furthermore, payments, durations, and APRs differ significantly. We recommend CreditStrong.
• Credit unions or community banks –You can find credit builder loans at credit unions or community banks.
• CDFIs – If your credit union or community bank does not provide them, consider contacting a community development financial institution. In the United States, there are approximately 1,000 of CDFIs organizations that assist low-income neighborhoods.
• Lending Circles – In such groups, around ten people each contribute a certain amount of money each month, and the money is distributed to one individual in a round-robin fashion until everyone has received a pot. Participants get interest-free “social loans,” with payments reported to credit bureaus.

Bottom Line

Credit builder loans can help build new credit, improve existing credit, and open doors to new opportunities to help them achieve their financial goals. They are a good choice for people with bad credit because the loan terms are flexible, and the interest rates are lower than those of traditional loans.

Credit builder loans are just one of the ways you can start to rebuild your credit. Other options, such as secured credit cards or unsecured bad credit credit cards, can assist you in rebuilding your credit.