Seeking a way to build or restore your credit without using a credit card? Consider a credit builder loan to get back on track while saving money. In this guide, you’ll learn how credit builder loans work and where to find the best loan products.
What is a Credit Builder Loan?
A credit builder loan is designed to help you build credit from scratch or rebuild positive credit history if you’ve had financial missteps in the past and ended up with bad credit. But unlike traditional personal loan products, the loan proceeds are held in an interest-earning account until you pay the balance in full.
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How Does a Credit Builder Loan Work?
Here’s what to expect if you get a credit builder loan:
- Step 1: Research credit builder loan options from credit unions, traditional banks and reputable online lenders, including Self.
- Step 2: Determine if you qualify and follow the application process required by the lender.
- Step 3: Upon approval, the lender will deposit the total loan amount into a Certificate of Deposit or interest-bearing account.
- Step 4: Make the required monthly payments to the lender for the duration of the term of your loan. The lender will report payment activity to the three major credit bureaus – Experian, TransUnion and Equifax. Positive payments will help improve your payment history and possibly increase your credit score.
- Step 5: At the end of the loan term, the lender will release the funds held in the CD or interest-bearing account (assuming the full loan amount balance is paid). The amount you receive will be equivalent to the initial loan amount minus administrative fees and interest.
There are no restrictions on how you can use the loan proceeds once they’re dispersed to you.
What Are the Terms and Fees of Credit Builder Loans?
These loan products usually come with a 12 or 24-month repayment term. You could also be charged a small administrative fee when you open an account.
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Can a Credit Builder Loan Hurt Your Credit Score?
Credit builder loans are designed to improve your credit health. However, they could hurt your credit score if you make late payments or skip payments altogether, and the lender reports the account as delinquent to the credit bureaus.
Quick note: You’ll generally have 30 days to bring the loan current before it’s reported to the credit bureaus. However, you could be subject to late payment penalties as soon as the loan is past due.
Do Credit Builder Loans Require a Credit Check?
In most instances, you won’t need to undergo a credit check to qualify for a credit builder loan. And if the lender does perform a credit check, it’s generally a soft inquiry that won’t affect your credit score.
How to Get a Credit Builder Loan
You can simplify the process of getting a credit builder loan by doing the following:
Decide How Much You Want to Borrow and for How Long
It’s ideal to decide on a loan amount and term before researching your options. Consider using a loan calculator to determine how much you can afford to pay each month towards a credit builder loan.
Compare Companies Offering Credit Builder Loans
Not all credit builder loans are the same. So, you want to shop around to ensure you find a loan product that best fits your needs, budget and financial situation.
Apply for the Loan
Before you apply, check with the lender to learn more about the qualification criteria. Most lenders require the following to be eligible for a credit builder loan:
- Be a U.S. citizen or permanent resident with a valid Social Security number
- Be 18 years of age or older
- Have a bank account, prepaid card or debit you can use to remit payment to Self
You can apply online for most credit builder loan products. However, the time it takes to receive a decision varies by the lender – online lenders typically issue instant decisions on loan applications.
Make On-Time Payments to Build Credit
As you make timely payments on the loan, your credit history will improve. It accounts for 35 percent of your credit score to improve over time.
Where Can You Get a Credit Builder Loan?
There’s no shortage of credit builder loan products on the market. However, Self features credit builder plans that are worth considering if you want a unique way to simultaneously save credit and build money. Here are your options:
- Small Builder: $25 per month for a 24-month period, and you’ll get $520 at the end of the loan term (APR: 15.92 percent) (Cost of the loan: $89)
- Medium Builder: $35 per month for a 24-month period, and you’ll get $724 at the end of the loan term (APR: 15.97 percent) (Cost of the loan: $125)
- Large Builder: $48 per month for a 12-month period, and you’ll get $539 at the end of the loan term (APR: 15.65 percent) (Cost of the loan: $46)
- X-Large Builder: $150 per month for a 12-month period, and you’ll get $1,663 at the end of the loan term (APR: 15.91 percent) (Cost of the loan: $146)
*Quick note: A $9 administrative fee applies if you’re approved and sign up for a Self credit builder plan.
Ready to apply for a loan from Self? Visit the Self website or download the mobile app to get started. It only takes a few minutes to apply, and you’ll receive a decision right away.