Credit builder loans are designed to help people with bad credit or with no previous credit history. With a credit builder loan, the amount you borrow is stored in a bank account. You make payments on that amount while building credit.
When you’ve paid the entirety of the amount, you get the money. Credit builder loans ensure that a person pays for the loan they’ve applied for. Hence, there is practically no defaulting with credit builder loans.
It allows people a chance to get a loan easily, despite their credit history. More importantly, it makes sure no one is a victim of a bad credit event. In addition, credit builder loans lean heavily towards what their name suggests (building up a good credit score).
On the other hand, credit builder loans are the least risky loans that lenders can give out. Therefore, according to lenders, it’s one of the best and safest products they can provide.
How Do Credit Builder Loans Work?
Usually, commercial banks don’t bother with credit builder loans because they work with volume. Credit builder loans are given by community banks or credit unions.
When you apply for a credit builder loan, the lender deposits the money in one of their bank accounts. You then start to make your monthly payments for both the principal and interest amount. The term period ranges between 6 and 24 months.
When you pay the amount in its entirety, you can get the total loan amount. You can consider it as a savings account where you put in a certain amount to save, while also building credit.
Improving Credit Scores with a Credit Builder Loan
While credit builder loans help build your credit, the success of it depends on the borrower. Like any loan, credit builder loans are also subject to late payments.
The lender has to report all payments made to credit bureaus, which means any late payment is recorded. Generally, good payment history makes up as much as 35% of your FICO credit scores. This means that missing out on a payment can have a serious impact on your credit history.
If the only reason you opted for a credit builder loan was that you wanted to build a credit history, then missing a payment would be a massive setback. Your FICO scores could drop by 60 to 110 points, which is massive considering the typical scores are between 300 and 850.
How to Get a Credit Builder Loan
You can follow these steps to apply for and get a credit builder loan.
- Find an Institution – You need to find the right financial institution that caters to your needs. You can check local banks, microfinance banks, credit unions, and online lenders in your vicinity. You should also make sure that the lender reports your payments to the 3 major credit bureaus.
- Pick an Amount – Decide on the value of the loan you want. Typically, credit builder loans range between $300 and $1,000.
- Compare Lenders – You will find that there are vastly different interest rates, monthly payments, fees, loan origination costs, and repayment periods for different lenders. That is because these small loans tend to be more expensive.
- Apply for the Loan – When you’ve decided on a lender, give them your basic information including your name, address, bank details, and contact information, among other things.
Because the approval of credit builder loans isn’t based on credit scores, you can definitely expect approval. Once it is approved, you’ll need to make timely monthly payments in full.
Cost of a Credit Builder Loan
How much a credit builder loan costs depend mainly on the lender. When looking for the right lender, you should keep these things in mind.
- Annual Percentage Rate – The APR is the amount charged by the lender on the funds you borrow. Usually, the APR for credit builder loans is less than 10%, but it can go beyond, in some cases.
- Interest Payments – Each lender has different rules for interest payments. Some only give you the principal amount when you’ve made all the payments. Others may even give you some of the interest you’ve paid.
- Other Costs and Fees – There are loan origination fees, application fees, and late fees involved in different situations. However, not all lenders impose such fees.
- Loan Repayment Term – Each lender has different loan terms, but the general rule is that the longer loan term you have, the more interest you’ll pay.
- Minimum and Maximum Loan Limit – Check the loan limits and borrow accordingly as you don’t want to borrow too little. Meanwhile, you can’t borrow too large an amount because that means more time to pay it back, which means more interest.
You need to find a lender that gives you the terms you want. Find the best possible fit, and apply for your loan.
All in all, credit builder loans are extremely useful in building credit, while also giving you a singular amount in the end, to improve personal finances. Incidentally, they are god for people looking to pay off student loans faster.
All you need to make sure is to get the loan terms you want from the right lender.