Can Credit-Builder Loans Improve Your Credit Score?
Credit-builder loans can help if you have poor credit or no credit history. With bad credit you may find it difficult to be approved for things like personal loans and credit cards. Lenders want to be sure that their customers will be able to repay their loans and bad credit will make them think twice about approving you. There’s no way to prove to the lender that you’re a reliable borrower if you don’t have a good credit score, but you also can’t build up your credit score without a loan. The solution to this problem is credit-builder loans.
What Are Credit-Builder Loans?
Also referred to as “Fresh Start Loans”, these loans are usually offered by community banks or credit unions. After you take out a credit-builder loan, a small amount of money will be deposited into a savings account for you. You will pay this amount back in small, manageable monthly payments with interest over the course of 6 to 24 months. After this, you will receive the total amount of your loan.
You won’t have access to the loan until it’s paid back in full — but having access to the money isn’t the point. This loan is a tool to rebuild your credit. Financial institutions offer these loans to help people rebuild their poor credit, and hopefully become a customer of theirs in the future.
The best thing about credit-builder loans for new borrowers is that they do not require good credit. As long as you have a steady monthly income, you will usually be approved for these loans. Additionally, on-time payments are reported to credit bureaus, which will have a positive impact on your credit reports.
How Much Do Credit-Builder Loans Cost?
While looking for a credit-builder loan, you’ll want to pay attention to the lender’s terms so that you can build your credit without losing a lot of money. All lenders charge an annual percentage rate (APR) to those looking to take out a loan. Most credit-builder loans have an APR of less than 10%, but some may be much higher. It’s also important to consider the amount of interest on your loan. You’ll have to pay more interest the longer your loan term lasts, and some lenders may keep the interest. Additional charges include application fees and late fees for missed payments.
Each lender will have different terms and rates, so be sure to ask for clarification about all the fees associated with their loans.
What Is the Process of Getting Credit-Builder Loans?
Find a financial institution that offers credit-builder loans. Since credit-builder loans are not heavily advertised, finding one can be difficult. A good way to find a provider of this type of loan is to simply research credit-loan providers in your state. Credit unions, banks and online providers like Selflender, who offers as little as $25 a month, will all be available to you. CDFIs (Community Development Financial Institutions) also offer credit-builder loans to those in lower-income communities.
- Make sure you can afford the payments. Agreeing to a higher payment plan can put you under considerable stress and won’t make you more impressive to the lender. Try choosing one with a low payment option with a term no longer than 24 months.
- Turn in a loan application. Since there are no credit requirements, approval for these loans is relatively easy. The amount of money that you’ve agreed to borrow, usually around $500-$1000, will be put into a separate bank account if the lender decides to accept your application.
- Make timely payments. Making regular payments will prove your worth to your lender, and your credit score will increase. Remember that these payments will be reported to credit bureaus by the lender, and late payments won’t look good on your record!
- Collect your loan. At the end of the term, you are rewarded with the full amount of money that you borrowed. You’ll also have a better credit rating and, depending on the loan’s terms, possibly some interest as well.
Can Credit-Builder Loans Really Repair My Credit?
The success of borrowing a credit-builder loan really depends on you and your money habits. Making your payments on time gives you a positive payment history, which makes up a big portion of your credit score. Because of this, a late payment could seriously damage your overall credit rating, especially if you didn’t have any at the start of your loan term.
To increase your chances of success with repaying a credit-builder loan, it’s important to find one with terms that you can meet. Do your research on different lenders and their loan requirements, interest rates, and repayment amounts. Getting approved for a credit-builder loan can give you a great head-start on the road to fixing your credit rating and helping you develop better saving habits.