Credit builder loans are an option for those with little or no credit to establish a positive credit history. This type of loan can also help those with poor credit reestablish good credit habits and raise their credit score.
Unlike most traditional loans, it’s generally very easy to qualify for a credit-builder loan. These loans are designed for borrowers with bad credit, so you don’t need to worry about having good credit to apply.
Whether you have a series of late payments in your past or no credit history at all, lenders that offer credit-builder loans typically focus only on your income when reviewing your application.
In addition to your income, the lender might also ask for:
- Employment verification
- Information about existing savings and debts
- Personal details that help verify your identity and ability to repay the loan
How Do Credit Builder Loans Work?
A credit builder loan helps borrowers build credit by providing an opportunity to make small monthly payments. As the lender reports regular loan payments to credit reporting agencies, your credit history will show you can make regular, on-time loan payments over the life of a loan.
Most credit builder loans are small, ranging from $300 to $1,000, which means they also have small monthly payments. Interest rates vary by bank, so be sure you compare all your options to get your best rate.
Related: Personal installment Loans for Bad Credit
Best Credit Builder Loans in 2021
1) Republic Bank
Republic Bank has a C- BBB rating. They claim that their Credit Builder program may improve your credit score in as little as 12 months, but note that this is not guaranteed. The money you borrow will be placed into a certificate of deposit (CD) where it will earn interest during repayment. You can learn more about the Republic Bank credit builder loan on their website.
- Loan Amount: $500 – $1,500
- Term Length: 12, 18, or 24 months
2) SELF
With Self, you’ll make a monthly payment of $25 to $150 (you choose the amount and term length). The money is held in a certificate of deposit account, or CD, that’s insured by the FDIC until you make your final payment. Then the funds are released to you.
- Loan Amount: $500 – $1,500
- Term Length: 12 to 24 months
3) Digital Federal Credit Union
Digital Federal Credit Union offers credit-builder loans, but it also provides other financial services, including personal and business banking, credit cards and insurance. It’s one of the 20 largest credit unions in the country, serving all 50 states.
- Loan Amount: $ $500 to $3,000
- Term Length: 12 to 24 months
Pros of Credit Builder Loans
- A credit builder loan forces you to save money, as you are essentially making payments into a savings account.
- Credit builder loans are secured by the money the bank has deposited for you, so they are typically easy to apply for.
- When the loan is paid off, you will receive a payment in the amount of the loan. Some lenders also pay you dividends or refund a portion of your interest.
- You will develop good savings habits through a credit builder loan, which requires you to set aside money every month for a loan payment.
- As you make payments on time every month, you’ll develop the financial discipline that you apply to bigger loans.
Cons of Credit Builder Loans
- Late or missed payments will be reported to credit reporting agencies, which could hurt your credit score.
- They aren’t all free. For one, Self Lender charges a $15 non-refundable administrative fee.
When you are looking to improve your credit score, credit builder loans are an affordable way to do it. Don’t forget to also consider other options such as applying for a secured credit card so you have a mix of different kinds of credit.
Make sure you shop around to find the most affordable credit builder loan when you’ve decided that taking out this type of loan is the right way to improve your score.
