Are you new to the credit world and seeking a way to build credit? Or maybe you have minimal credit history and can’t get approved for a loan or credit card to start improving your credit profile? A credit builder loan could help you meet your credit goals.
What Are Credit Builder Loans?
Credit builder loans are installment loan products that help consumers establish or rebuild positive credit history. They’re not the same as personal loans, though. Instead of receiving the loan proceeds when you’re approved, the lender will hold the money until the loan is paid off.
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How Do Credit Builder Loans Work?
Below is a step-by-step overview of how credit builder loans work:
- Step 1: Explore credit builder loan options. They are generally offered by community banks, credit unions, and online lenders, like Self.
- Step 2: Choose the best option and submit an application.
- Step 3: The lender will deposit the loan proceeds into a savings account or CD if your application is approved
- Step 4: You will make monthly payments over the loan term, which varies by lender. Payment activity is reported to the three major credit bureaus – Experian, TransUnion, and Equifax.
- Step 5: When you pay the loan in full, the lender releases the funds in the savings account or CD to you. (Quick note: the lender may charge administrative fees or deduct interest from the balance – be sure to check each lender’s specific policies before making your decision), so the total you receive will be lower than the initial loan amount). You’re free to use the money how you see fit.
The Benefits of Credit Builder Loans
Credit builder loans offer the best of both worlds. You can build credit while saving money and take the first step towards improving your credit health. Some additional benefits of these loan products:
- Good or excellent credit not required: If you have little to no credit or poor credit, it’s not necessarily a deal-breaker if you apply for a credit builder loan. You could also be eligible for a loan if you’ve had a series of credit missteps in the past.
- Affordable monthly payments: Most credit builder loans come with affordable monthly payments that should easily fit in your budget. The lender will likely evaluate your income when you apply to ensure you can afford to make payments on your loan.
- Monthly reporting to the credit bureaus: Payment history accounts for 35 percent of your credit score. Each time you pay on time, this information is reported to the credit bureaus to be added to your credit report and could help strengthen your credit health.
- Save money while building credit: As you make monthly payments on your credit builder loan, you’ll be one step closer to accessing a pool of cash that can be used to boost your savings account.
- Lower interest rates and fees compared to credit card products: You’ll likely pay an administrative fee to open a credit builder loan account, but it’s generally a fraction of what some credit card issuers charge for annual fees. Plus, the interest rates for credit builder loans are typically lower than credit card APRs.
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What You Need to Qualify for a Credit Builder Loan
It is relatively easy to qualify for a credit builder loan. But the information you’ll need to provide when applying depends on the lender. Beyond identifying information, like your name, address, Social Security number, and phone number, the lender could request the following:
- Employment status and proof of income
- Housing status and monthly mortgage or rent payment
- Bank account information and balances
Most lenders also require a one-time administration fee when you open a credit builder loan.
Can You Get a Credit Builder Loan With No Credit Check?
If you apply for a credit builder loan, the lender could perform a credit check. If it is what’s known as a soft credit inquiry, it won’t impact your credit score. If it’s a hard inquiry, however, it could have a temporary negative impact on your credit score. Check with the lender before making your application.
Where to Find a Credit Builder Loan
There are many credit builder loan options available. But if you want a lender that offers an innovative way to build credit while saving money, look no further than Self. It is a financial technology company that partners with banks to offer exceptional credit-building tools to deserving consumers.
At the time of writing, you can choose from four Self credit builder plans. You can visit the Self website for most up to date information regarding their pricing plans to see if anything has changed:
- Small Builder: Pay $25 per month for 24 months and receive $520 back. The annual percentage rate is 15.92 percent, and the total cost of the loan is $89.
- Medium Builder: Pay $35 per month for 24 months and receive $724 back. The annual percentage rate is 15.97 percent, and the total cost of the loan is $125.
- Large Builder: Pay $48 per month for 12 months and receive $539 back. The annual percentage rate is 15.65 percent, and the total cost of the loan is $46.
- X-Large Builder: Pay $150 per month for 12 months and receive $1,663. The annual percentage rate is 15.91 percent, and the total cost of the loan is $146.
There’s also a one-time administrative fee of $9 when you sign up.
Credit builder account holders can also get a Self Visa Credit Card after making at least three on-time monthly payments. The loan must also be in good standing with a savings balance of at least $100. If you take advantage of this, a percentage of your savings with Self will be used to secure your credit limit. Upon receiving your card, it can be used anywhere that accepts Visa. Self periodically reviews card activity and could increase your credit limit or upgrade you to a partially unsecured credit card over time. For full eligibility information regarding the Self Visa Credit Card, you can visit the Self website.
If you want to earn money while using Self, spread the word to your friends and family. You’ll earn $10 every time someone you refer opens a Credit Builder Account and makes their first loan payment on time. Learn more about this referral reward feature by visiting the Self website.
Get started with Self today and start building your credit while building savings. You can use the online tool to apply and in most cases receive an instant decision. The application usually only takes a few minutes of your time.