Credit Builder Loans
If you have bad credit you are not alone. A recent survey indicated thatover halfof all Americans have credit scores that prevent them from getting access to good interest rates. Additionally, many people cannot qualify for an automobile loan or mortgage due to their credit problems; a bad credit score could also affect your ability to rent an apartment or land a good job as well.
One of the methods that Americans use to improve their credit is by taking out a credit builder loan (or, CB loan). Let’s take a look at credit builder loans, so you can see whether or not they are a good fit for your current financial situation.
What is a Credit Builder Loan?
A credit builder loan is a specific type of loan whose sole purpose is to help improve a borrower’s credit score. These types of loans are typically used by people with poor credit, or with little to no credit history. Lenders issuing these types of loans normally limit their risk exposure by depositing the loan balance in a savings account. The borrower then makes regular monthly payments towards the loan balance. Meanwhile, the lender reports successful payments to all of the credit bureaus on behalf of the borrower, which helps to improve the borrower’s credit rating. Once the borrower completes making all of the loan payments, he or she receives control of the deposited lump sum of the loan from the lender.
In most cases, these loans only consist of a few hundred dollars, so they are easy to pay off for most borrowers. Since CB loans are specifically designed for people with bad or no credit, you do not need to have a good credit score to be eligible for the loan; some lenders do not even do a credit check before issuing their credit builder loans. However, in most cases, the borrower will have to demonstrate that he or she has the income required to consistently make monthly loan payments.
Do Credit Builder Loans Work?
Credit builder loans can be helpful to improve credit in many cases. Making consistent payments to a lender as you repay the loan helps build your payment history, which constitutes about35 percentof your credit score. However, if you are consistently late (over 30 days delinquent) on repaying your CB loan, or continue to make late payments on other bills, you won’t likely see any major improvements in your credit score; it may even get worse. Additionally, if you have other credit issues, such as excessive amounts of debt, a CB loan may not make much of a difference either.
Finally, in order to even qualify for a credit builder loan, you will have to demonstrate to the lender that you can make consistent payments over the life of the loan. If you are unemployed or expect to be, you may not even be eligible to take one of these loans out. In that case, you’ll need to consider other options to address your credit issues.
How Much Do Credit Builder Loans Cost?
The cost of credit builder loans is determined by a number of factors. They are as follows:
APR: The annual percentage rate (APR) is the amount your lender charges you to borrow loan funds. It is the annual interest rate charged on a loan. Most credit-builder loans have an annual percentage rate (APR) of less than 10%, but some have higher rates.
Interest: Interest payments are the sums of money that a lender or financial institution receives in exchange for lending money. It differs from the APR in that it excludes several minor charges. Depending on the lender, some or all of the interest you pay may be retained, leaving you with only the remaining balance at the end of the loan term.
Other Fees: As with most loans, you may be charged an application fee when you apply for the loan, as well as a late payment fee if you do not make your periodic payments on time.
The Loan Repayment Term: This factor has a significant impact on the amount you will pay to obtain any type of loan. Generally, the longer your loan term, the more interest you will pay and the lower your monthly repayment amount. In contrast, the shorter the loan term, the less interest you will pay because you will pay off the loan and interest in a shorter period of time.
Managing a Credit Builder Loan
Managing a credit builder loan, like obtaining a new loan, entails responsibilities. The following are the steps you must take as soon as you receive the loan.
Choose The Appropriate Type Of Credit Building Loan: The first thing to consider when selecting a loan facility is the loan’s terms. This will impact your monthly payments as well as the amount of time you will be in debt. Look for a loan with a payment you can comfortably afford, as going over your budget can result in you missing a payment, which can damage your credit score. The average loan amount ranges between $300 and $1,000. In addition, you should look for a loan that reports payments to all three major credit bureaus in order to ensure that timely payments have a positive impact on your credit score.
Pay Your Loan On Time: Because information about loan repayment is reported to credit bureaus, paying your loan on time will help you build credit. However, if you delay payment for more than 30 days, your credit may suffer significantly.
Keep An Eye On Your Credit Score: It is natural to monitor your credit score movement after obtaining your loan and consistently making the required periodic repayments. To properly monitor your score, you should use a personal finance website that updates your score more frequently, such as weekly. You shouldn’t however get too hung up on small movements as you keep an eye on your score’s trend.
Determine What You Want To Do With The Loan Proceeds: You will have money and possibly a better credit score at the end of your loan term. This money can be used as an emergency fund in the event of unexpected expenses. By having this fund available, you are protected against obtaining a loan, which could result in missed payments and a lowered credit score.
Where To Find Them
Credit Builder Loan Companies
If you do decide to take out a CB loan to improve your credit, you have many different options. You could choose to take advantage of one of the credit builder loan companies out there. Some of these companies, like Self, are online, and you can apply and be approved for a credit builder loan right from the comfort of your own home. Some of the more popular companies currently offering credit builder loan companies include:
Where to Find a Credit Builder Loan
Smaller financial institutions, such as community banks and credit unions, typically offer credit builder loans. Regardless of their size, these institutions ensure that your credit report is timely reported to at least one of the credit bureaus while also allowing you to save money. Some of the places where you can get credit builder loans are as follows.
CDFIs
A Community Development Financial Institution, or CDFI, is a good place to start looking for credit-builder loans. These institutions, which are available in over a thousand locations across the United States, provide low-income, low-wealth, and other disadvantaged members of the community with affordable lending. CDFIs typically assist in the financing of small businesses, microenterprises, nonprofit organizations, commercial real estate, and affordable housing, but many of them also provide credit-builder loans to deserving members of the public. CDFIs are profit-oriented organizations, though they are not profit-maximizing ventures because their primary goal is to serve the community rather than their shareholders.
Credit Unions Or Community Banks
If CDFIs are not really an option for you as you seek out a credit-builder loan, you could also consider credit unions or community banks. Credit unions, however, have specific requirements that must be met before membership is granted. One of these is residing in a specific county. Others are by making a small charitable donation, working for specific companies, or attending a specific church. You can find a credit union in person or online by entering your state into a web search. For example, your keyword should be “’your state’ + credit builder loan.”
Lending Circles
This is a one-of-a-kind credit-building strategy. This technique can be used in a circle of family or friends. Participants, usually around ten, agree to withdraw funds into a specific amount, which is then distributed to one of the participants each month. Each participant receives his or her share of the money in a round-robin fashion until everyone has received their separate share of the monthly pool. The amount given to participants is interest-free, and payments from each lending circle member to the pool are reported to credit bureaus, ensuring timely payments influence credit.
Online Lenders
A simple Google search will yield a long list of online lenders offering credit-building loans. Because these lenders are not licensed to perform in all states, it is necessary to research the lenders before accepting any of their offers. Aside from that, you should compare offers because terms and payments vary greatly.
Traditional Bank Financing
Credit building through strategic borrowing from a bank is an effective method of credit building. Some banks allow you to use the deposit you have in your account as collateral to get a loan. Typically, after obtaining such a loan, your deposit will be frozen until the money loaned is fully repaid. Also, the loan amount is usually less than the deposit you have in your account.
Loan payments that are made on time will have a positive impact on your credit score because they are typically reported to credit bureaus. It is worthwhile to contact any of your bank’s officials to find out if such loans are accepted by your bank.
Alternatives
Alternatives to credit builder loans:
If you are trying to improve your credit score, there are other ways to build it up beside taking out a credit building loan. Some of the most popular means people use to build up their credit include:
- Debt Consolidation Loans. A debt consolidation loan combines all your existing debts, such as credit cards, into a new single loan with a low-interest rate. Debt consolidation makes your debt more manageable, and easier to pay back, which can help you to better maintain a good payment history and pay down your overall debt. This can help you improve your credit score.
- Credit Counselors. If you have bad credit and runaway levels of debt, you should consider speaking to a credit counselor. Credit counselors can examine your debts and spending habits, and help you formulate a strategy to get your financial situation under control. In some cases, they will even interact with creditors on your behalf. Many credit counselors work for nonprofits and offer their services free of charge, too.
- Zero Interest Credit Cards. Many credit card companies offer zero interest promotions that enable you to receive a credit card that charges no interest for a limited promotional period (usually 12-18 months). If you qualify for one of these cards, you can transfer your outstanding debt balances to it, then pay them off during the promotional period interest-free. This can help build your credit back. However, ensure you pay back your debts before this period expires, or chances are the card will revert to charging you high levels of interest.
- Being Added to a Credit Card as an Authorized User: Being an authorized user on a credit card with good credit can help you improve your own credit. As an authorized user, the card’s account history will be added to your credit report. All you have to do is find a friend or relative who has excellent credit and is willing to share his or her card with you. Note that you would not need to obtain the card from the individual, nor would you need to make any charges with it, as simply being associated with it would have a positive impact on you.
Wrap Up: Building Credit With Loans
Credit building loans can be a useful tool for improving your credit. If you’re worried about your credit score and how it may be holding you back from key life opportunities, such as buying your first home, you should check and see if a credit-building loan would work for you.
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