What are Credit Builder Loans?
Getting a loan without a credit history is next to impossible. It’s the reason why lenders always ask for your credit history. They need to confirm that you can repay the loan in time.
The credit history will show them your payment history and your debt. These two elements enable them to come up with a decision on whether you are a reliable person.
Without any debt, which also means that you have no history of repayments or a late payment, the lender would not risk to offer you a loan.
In such situations, the best way to build a credit history is by applying for a credit builder loan. These loans will help you access other loans in the future.
What are Credit Builder Loans?
Building a stellar credit can be a daunting task that requires mountains of patience. You have to maintain consistent payments to put a smile on the lender’s face. However, there are various ways you can do this, including applying for a credit builder loan.
Just as the name suggests, a credit builder loan is a loan crafted with consumers who have a poor credit in mind. This loan helps such consumers build a credit history.
The best part about this is that you don’t need a good credit to get approved. What you need is sufficient income to pay the installments.
How Do Credit Builder Loans Work?
As mentioned in the last part of the above segment, the loan allows you to pay in monthly instalments. These small payments will indicate on the lender and the latter will report your on-time payments to other credit reporting agencies. As a result, your credit history will indicate that you are reliable.
A good number of credit builder loans range from $300 – $1,000. Since they are quite small, so are their monthly instalments. The interest rates may vary from one bank to another, so always make sure that you compare and confirm the same.
Conduct due research
Credit builder loans are a fantastic way to build a good credit history. However, these loans are not for free. This means that there are interest rates and fees applied to the loans. In fact, other lenders ask for application fees.
To be on the safe side, always take some time to do your own research regarding such fees and interest rates before you apply for a credit builder loan.
Where to Get Credit Builder Loans
- Community banks and credit unions – as much as credit builder loans are a life-saver, they could be difficult to come by. One of the best ways to find one is by searching online. You could end up finding a credit union or community bank that offers these loans.These lenders, however, come with strict membership requirements, including worshipping in a particular church, working in a certain county, among others. Nevertheless, the two offer the lowest interest rates.
- Online lenders – There are numerous online lenders these days. All you have to do is search for “online lenders offering credit builder loans” and voila! A list is before your eyes. Take Self Lender for example. This lender offers loans with instalments as low as $25 per month for a 2-year term. They also have competitive interest rates that start from as low as 16% and you get reported to at least 3 major credit bureaus.
- CDFIs (Community Development Financial Institution) – Just as the title suggests, these financial institutions target communities, particularly the less privileged communities. There are at least 1,000 of such institutions in the United States.
- Lending circles – This is a fantastic initiative started by a non-profit organization called Mission Asset Fund. This is how it works. Friends and families come together to form a bank-like platform that involves around 10 individuals.
Each participant remits a certain agreed amount per month and the total amount raised is issued to one person. The individual is then required to repay the loan over a certain period of time and the process starts again for another person.
These loans are good since they come with no interests or other fees for that matter. In addition, you get reported to credit bureaus.
These lending circles aren’t available everywhere, so you’ll have to search your area for one.
How to Find and Manage Credit-builder Loans
Now that you know where to find credit builder loans, here are some tips on how to make sure that the loan works to your advantage.
- Find an affordable loan. You need to find a credit builder loan that has affordable payments. Don’t be in a rush to apply for loans with higher payments. That will only escalate the situation. Go for loans that offer repayment periods of up to 24 months.
- Start the application process. Once you get approved, you will receive your money in your savings account although you won’t access the same until you repay the loan in full. The lenders put this measure in place to act as collateral if you have poor or no credit at all.
- Make consistent on-time payments. Always strive to make all due payments on time. If you do that, the lender will send good reports to major credit reporting agencies. However, if you take more than 30 days to make a payment, then you can be sure that your credit score will suffer.
- Keep an eye on your credit score. There are a number of websites that offer free credit scores. Frequent such sites and monitor your movements. They could be small, but significant in the long run.
- Pick your loan as well as the interest, if any. Once you complete your loan, you can access your money as well as your stellar credit score if you made on-time payments.
Other Ways of Building Your Credit
Credit builder loans aren’t the only way to build a good credit score. There are other numerous ways you can employ to achieve the same result. Take a look at some of them below:
Apply for a Secured Credit Card
Secured credit cards are a simple way to rebuild or build a credit history. The application procedure is quite similar, only with secured credit cards, you’ll need a deposit of around $50 to $300 in a different account.
The bank will then issue a credit line that is more or less equal to your deposit thereby allowing you to build a credit history without the lender having to take a risk.
With these secured credit cards, you can use them as the conventional cards that allow you to make little payments every month while charging you a reasonable amount. If you prove that you are a reliable customer, the bank may decide to upgrade your card to an unsecured, regular credit card account. Your worthiness comes about when you make consistent on-time payments.
A number of banks also report secured cards to various credit reporting agencies. So, this might be a chance to build your credit the best way.
There are a number of pros and cons associated with credit builder loans as follows:
- Credit builder loans push you into a habit of saving since you’ll be making payments into the savings account.
- Credit builder loans come with security which is the money the bank deposited in your account. So, they are easy to qualify for.
- After you repay your loan, you’ll get your payment equal to the loan. Other lenders could also offer you a refund or pay dividends.
- By paying monthly instalments, you gain some sense of financial discipline that you’ll carry into bigger loans.
Cons of Credit Builder Loans
- If you miss out or delay on a payment, the lender will report you to credit reporting agencies thereby damaging your credit score.
- Not all credit builder loans are free. Some lenders charge some fees such as administrative fees that range between $9 and $15 including the APR.
Getting Another Person’s Credit Card on Board
You can ask a close friend or relative to add their credit card account as an authorized user or a joint account holder. For the latter, the responsibility to make any payments lies with the both of you. This means that any late payments will impair both account holders.
On the other hand, the authorized person will have access to the account even though they may to be tasked with the responsibility of making payments.
Both options are a fantastic way of building your credit, but some creditors may not report authorized accounts to credit reporting agencies. As such, make sure to confirm with the bank before you go ahead and include the card.
Get an Unsecured Personal Loan
This another great way to build your credit, thanks to the ease in qualification for an unsecured personal loan. These loans start from as low as $2,000 and go all the way to up to $50,000. Even better is that these amounts are available to borrowers with low credit scores.
The lender will offer you the whole amount and you can use the money to pay the loan in a bid to build your credit.
As much as these loans are great when it comes to building your credit, they come with their own share of risks. First are the fees involved, including origination fees. The other is the high interest rates associated with the loans.
Some lenders have high interest rates that go as high as 36%. The reason for such high interest rates is that these lenders have no collateral. Instead, they use your credit strength.
Credit builder loans are a great way to build credit history. However, it is crucial that you make consistent on-time payments. Such discipline in building a strong profile in terms of financial reliability enables you to access other loans such as auto loans and mortgages with favorable ratings among credit reporting agencies.