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Mastering the Credit Builder Loan: Your Key to Enhanced Credit

Embarking on the journey to better credit? The Credit Builder Loan might be your ideal companion. Unlike traditional loans, this unique financial tool allows you to demonstrate your creditworthiness by making consistent payments. As you progress, not only do you enhance your credit score, but you also cultivate financial discipline. Dive in to understand its mechanics, the institutions offering it, and the transformative impact it can have on your financial profile.
Offers: 3
Updated:
28.02.2024
08:41
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1000
100.00 – 2000.00 $
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0.05 – 2.50 %
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5 days – 3 months
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300
650
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2000.00 – 100000.00 $
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Effective interest rate on the product

6.34 – 35.89 %
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Loan term for the financial product

2 months – 72 months
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4.25
(20 Ratings)
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$500-$4,000
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Effective interest rate on the product

up to 160%
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Loan term for the financial product

9-18 months
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The Legal Status of Credit Builder Loan in the USA

Credit builder loans are legally recognized and permitted in the United States. When financial institutions provide these loans, they are bound by several federal and state regulations. One of the primary federal laws they must adhere to is the Truth in Lending Act (TILA), which mandates that lenders clearly disclose the terms and costs associated with the loan to borrowers. Additionally, under the Equal Credit Opportunity Act (ECOA), lenders are prohibited from discriminating against borrowers based on factors such as race, color, religion, national origin, sex, marital status, age, or the receipt of public assistance. Furthermore, the Fair Credit Reporting Act (FCRA) ensures that lenders report credit information in a manner that is accurate, fair, and respects the privacy of consumers. As with all financial and legal matters, it's essential to stay updated with any changes or amendments to these laws or the introduction of new regulations concerning credit builder loans.

Reviews
CreditFresh
4.8
The application process was a breeze, and I received a response within minutes. This straightforward and prompt procedure proved to be a great help to me during a crucial time of need.
Review
JG Wentworth
4.6
The assistance I received was exceptional. My representative handled my case with care and provided all the necessary information...
Review
OneMain Financial
4.4
The loan application process was straightforward, and the representative I interacted with displayed patience, provided informative answers, and was quite pleasant throughout...
Review
My Funding Choices
4.6
The process was swift and straightforward, which was particularly helpful during a time when, despite my reluctance to seek assistance, I genuinely needed help.
Review
Plain Green Loans
2
The interest rate is shockingly high, and it feels like taking advantage of individuals facing financial challenges when unexpected expenses arise...
Review
Advance America
4.6
I have never encountered any issues with this company. They consistently deliver funds on time, and the repayment process is straightforward...
Review
Mastering the Credit Builder Loan: Your Key to Enhanced Credit

What is a Credit Builder Loan?

A credit builder loan is offered by banks, credit unions, or specialized financial institutions in the United States with the specific purpose of helping individuals to establish or improve their credit score. It functions as a tool that allows individuals to establish a credit history or rebuild and improve an existing poor credit rating, which can lead to better access to credit in the future.

Credit builder loans work differently from other traditional loan offers. First, the lender holds the borrowed amount in a secure account such as a certificate of deposit (CD) or savings account. The borrower then makes fixed monthly payments, which are reported to the credit bureaus as a positive payment history. After the borrower has successfully repaid the loan, the money they borrowed is released to them, and they have improved their credit score.

There are two types of credit builder loans: secured and unsecured. A secured credit builder loan requires an asset as collateral, such as a savings account, whereas an unsecured credit builder loan does not require collateral but may have higher interest rates.

Credit builder loans offer borrowers an opportunity to establish or rebuild their credit history in a structured way and enable them to improve their credit scores over time. Credit builder loans can also help individuals achieve their financial goals, like purchasing a home or car.

Features

  1. Establish or improve credit history. Unlike traditional loans, credit builder loans are not intended to provide immediate funds to the borrower. Rather, the loan is structured so that the borrower makes regular payments over time, which are reported to the credit bureaus. These payments are used to establish a positive payment history, which is a key factor in determining one's credit score.

  2. Secured loans. Unlike traditional loans that require collateral (such as a house or car), credit builder loans are typically secured by a savings account. The borrower must make regular payments towards the loan, which are then deposited into the savings account until the loan is paid off. At that time, the borrower can access the funds in the savings account.

  3. Interest rates. This is because the loans are typically smaller and are designed to be paid back over a shorter period of time. Additionally, because the loans are secured by a savings account, there is less risk for the lender.

  4. Accessible to almost anyone. Because credit builder loans do not require a credit check, they are a great option for people who have bad credit or who are new to credit.

Pros and cons

Pros

Helps build credit. Credit builder loans are designed to help build credit scores. On-time payments are reported to the credit bureau, thus increasing your credit rating.

Lower interest rates. Credit builder loans have lower interest rates compared to other types of loans. So, they can help individuals save some money on interest payments.

Helps in financial planning. With a credit builder loan, borrowers are required to make regular monthly payments, which helps them in financial budgeting and planning.

Cons

High fees. Credit builder loans can sometimes come with high fees. Some lenders charge fees for origination, processing, and administration.

Limited loan amount. Most credit builder loans come with a relatively low loan amount. This means that borrowers may not have access to sufficient funds to meet their financial needs.

Slow process. Credit builder loans can sometimes take longer to process and approve compared to other types of loans. This can be a disadvantage for people who need funds urgently.

Risk of default. If borrowers fail to make timely payments, they may end up defaulting on the loan. This can negatively impact their credit score and make it even more difficult to get credit in the future.

How to get a Credit Builder Loan?

Apply for a loan

  1. Know your credit score. Before you apply for a credit builder loan, you need to know your credit score. This will help you understand what type of loan you may qualify for and what interest rates you may receive. You can access your credit score for free once a year.

  2. Research lenders. There are several mainstream banks and credit unions offering credit builder loans in the US. You can also find alternative lenders online who specialize in these types of loans. Be sure to read reviews and compare interest rates and fees before applying.

  3. Decide on the loan amount. Credit builder loans are typically small loans, usually between $300-$1,000. The amount you borrow should be manageable for you to repay and will vary based on your lender's requirements.

  4. Apply for the loan. Once you've chosen a lender, you can start the application process. To apply, you will need to provide personal information, such as your name, address, and social security number. You may also be required to provide your income information or employment status.

  5. Make payments on time. Once you receive the funds from the loan, you must make timely payments on the loan to establish credit. The lender will report your payments to the credit bureaus, which will help improve your credit score.

  6. Monitor your credit score. You need to monitor your credit score regularly to track your progress. Most lenders offer online access to your payment history to help you keep an eye on your score.

Requirements and conditions

  1. Minimum age. The applicant must be at least 18 years old to be considered for a credit builder loan.

  2. Income requirement. Most lenders will require the applicant to have a steady source of income to ensure they have the ability to repay the loan. This could be through employment, self-employment, or other sources such as rental income.

  3. Credit check. While credit builder loans are typically offered to people with poor or no credit history, some lenders may still require a credit check to determine if there are any outstanding debts or late payments.

  4. Collateral. Some lenders may ask for collateral to secure the loan, such as a car or savings account. This helps to mitigate the risk of lending to someone with poor or no credit history.

  5. Residency. The applicant must be a legal resident of the US to qualify for a credit builder loan.

  6. Bank account. Most lenders require the applicant to have a bank account in good standing to ensure that loan payments can be processed and to verify their financial stability.

  7. Employment history. While not always a requirement, some lenders may look at the applicant's employment history to determine their ability to repay the loan and their overall financial stability.

Best places to get a Credit Builder Loan today 28.02.2024

Self

Apply for a loan

Self is a company that offers credit builder loans with no credit check required. These loans range from $600 to $1,800 and are paid back over 12 or 24 months. Self-reports to all three credit bureaus, which helps borrowers build their credit score.Self

Credit Strong

Apply for a loan

Credit Strong offers credit builder loans ranging from $500 to $2,500 with repayment terms of 12 to 24 months. This lender reports to all three credit bureaus and offers a variety of loan options to cater to different financial situations.Credit Strong

Chime Credit Builder

Apply for a loan

Chime is a credit builder loan program offered by Chime Bank. This loan offers up to $1,000 with a 12-month repayment term. The loan is paid back in installments, and Chime reports to all three credit bureaus to help borrowers build their credit score.Chime Credit Builder

OppLoans

Apply for a loan

OppLoans is an online lender offering personal loans and credit builder loans to people with bad credit. The credit builder loans range from $500 to $4,000 with repayment terms of up to 24 months. OppLoans reports to all three credit bureaus to help improve borrowers' credit scores.OppLoans

OneMain Financial

Apply for a loan

OneMain Financial is another online lender that offers credit builder loans to people with bad credit. These loans range from $1,000 to $20,000 with repayment terms of up to 60 months. OneMain Financial reports to all three credit bureaus and offers personalized loan options to borrowers.OneMain Financial

Ways to get the money

  1. In person. Many community banks and credit unions offer credit builder loans, and you can typically apply for the loan in person at the bank or credit union. You will need to provide some basic financial information, including your income and employment status. If you are approved for a loan, you may be able to receive the funds in person, either in the form of a check or cash.

  2. Direct deposit. Some lenders offer credit builder loans that are funded through direct deposit. This means that the loan amount will be transferred directly to your bank account, and you can use the funds to make payments on the loan or pay off other debts. Direct deposit loans can be a convenient option because you can access the funds quickly and easily.

  3. Debit card. Some lenders may offer a debit card option for receiving the money from a credit builder loan. This means that the funds will be loaded onto a prepaid debit card that you can use like a regular debit card. This can be a convenient option if you don't have a bank account or if you prefer to use a prepaid debit card for your finances.

  4. Check. Some lenders may also offer the option of receiving a check for the funds from a credit builder loan. This means that the lender will send you a check for the amount of the loan, which you can then deposit into your bank account or cash at a bank or check-cashing location.

Things to pay attention to

  1. Do your research. There are various lenders that offer credit builder loans, so do your research and compare the interest rates, fees, and terms of each lender. Look for a lender that reports to all three credit bureaus, as this will help you establish a positive credit history across all the credit bureaus.

  2. Understand the fees. Credit builder loans often come with fees, such as origination fees, maintenance fees, and prepayment penalties. Make sure you understand all the fees associated with the loan before you sign the agreement.

  3. Make payments on time. Timely payments are key to building credit with a credit builder loan. Late payments or defaulting on the loan can negatively impact your credit score and defeat the purpose of the loan.

  4. Plan ahead. Make sure you can afford the loan payments before taking out a credit builder loan. Late payments or defaulting on the loan can cause damage to your credit score and make it harder to obtain credit in the future.

  5. Set a budget. Since credit builder loans require monthly payments, it is important to plan your budget accordingly. If the loan payment is too high, you may need to adjust your budget to ensure timely payments.

How to repay a Credit Builder Loan?

  1. Understand the terms and conditions. This includes the amount of the loan, the interest rate, and the repayment schedule.

  2. Set up automatic payments. One of the best ways to make sure that you don't miss any payments is to set up automatic payments. This can usually be done through your bank or through the lender. Ensure there is enough money in your bank account to make the payments.

  3. Make more than the minimum payment. While making the minimum payments on a credit builder loan will help you build your credit history, it is ultimately better to pay more than the minimum amount due each month. This will help you pay off the loan faster and will save you money on interest charges.

  4. Monitor your credit report. It is important to monitor your credit report regularly to ensure that the payments are being reported accurately. If you notice an error or a discrepancy, you should contact the credit bureaus to have it corrected.

  5. Make sure that the loan is paid off in full. Once the loan is paid off, the money that was deposited into the savings account will be released to you. This can be used to pay down other debts, build an emergency fund, or for any other purpose.

Alternatives

Apply for a loan

Credit builder loans are a popular way for individuals to build their credit history, but they are not the only option available in the US. In fact, there are several alternatives that individuals can explore to boost their credit score and establish a good credit history.

  1. Secured credit cards. A secured credit card is an excellent way to start building credit, especially if you have a limited credit history or have been denied credit in the past. With a secured credit card, you typically deposit a certain amount of money, which serves as your credit limit. The secured credit card issuer reports your on-time payments to the credit bureaus, helping you establish a good credit history.

  2. Co-signed loans. If you have a friend or family member with good credit, you may be able to co-sign on a loan to help build your credit history. When you co-sign a loan, you are responsible for making payments if the primary borrower fails to do so. Co-signed loans are typically easier to obtain than unsecured loans, and the on-time payments will show up on your credit report.

  3. Becoming an authorized user on a credit card. If you have a trusted family member or friend with excellent credit, you could ask them to add you as an authorized user on their credit card. As an authorized user, you will be able to make purchases on the card, and the account holder's payment history will appear on your credit report.

  4. Rent reporting services. Rent reporting services, such as Rental Kharma or RentTrack, can help you establish a credit history by including rent payments on your credit report. This option is excellent for individuals who don't want to take out a loan or a credit card to build credit.

  5. Credit counseling. If you're struggling with bad credit, consider working with a credit counseling agency. They can help you come up with a debt management plan to pay off your outstanding debts and help you prioritize which debts to pay off first.

Editorial opinion

Credit builder loans can be a useful tool for people who are trying to improve their credit scores and build their credit histories. However, they can be expensive. Many credit builder loans come with high interest rates and fees. In some cases, the cost of the loan can outweigh the benefits of improving your credit score. If you cannot make ends meet, it can be difficult to commit to regular loan payments. Missing payments can have a negative impact on your credit score. The decision to take out a credit builder loan is a personal one that should be made based on your individual financial situation and goals. If you are struggling with debt or other financial issues, it may be worth consulting with a financial advisor or credit counselor to explore your options and make a plan for improving your financial health.

Important

Keeping your Debt-to-Income (DTI) ratio below 30-40% of your monthly income is crucial. This will help you avoid potential financial problems in the future. Additionally, always assess the necessity and feasibility of taking a loan, ensuring you can comfortably manage its repayment.

Methodology

At Finanso, we've carried out a comprehensive analysis of over 50 microfinance organizations, assessing them based on 35 different parameters across six key categories: accessibility of loans, customer relations, quality of service, interest rates, and transparency of conditions.

In each category, we carefully considered the most critical factors in selecting a lender. These factors include the interest rates, available loan amounts, minimum credit score, minimum income, application fees, and the speed at which funds are transferred.
At Finanso, we highly value our users, which is why we also focus on the quality of customer service, user reviews, and additional features that can aid our users in making a well-informed decision.

Our ultimate goal is to provide insightful recommendations and expert advice to assist you in selecting a lender that best caters to your specific needs.

Sources

FAQ

Is a credit builder loan a good idea?

If you have little or no credit history and are looking to build your credit from scratch, a credit builder loan may be a good option for you. Similarly, if you have a poor credit score and are looking to improve it, a credit builder loan may be a good way to do so.

However, if you already have a strong credit history and score, there may be better options available to you. In general, credit builder loans tend to have higher interest rates than other types of loans, which can make them more expensive in the long run. Additionally, since the amount of money you can borrow is typically quite small, a credit builder loan may not be sufficient if you need a larger sum of money for a specific purpose.

How much money can you get with a credit builder loan?

In terms of how much money you can get with a credit builder loan, it's usually a relatively small amount – typically between $500 and $1,500. This is because the purpose of the loan is to help you build credit, not to provide you with a large sum of money. However, some online lenders may offer larger credit builder loans, so it's worth shopping around to find the best option for you.

Can you be denied a credit builder loan?

Lenders will look at your credit score and credit history to determine whether you are a good candidate for a credit builder loan. If you have a poor credit history or a low credit score, you may be denied or offered a loan with unfavorable terms.

If you are denied a credit builder loan, there are other options available to help you build credit. For example, you could consider getting a secured credit card, which requires a security deposit but can help you establish credit if you use it responsibly. You could also consider becoming an authorized user on someone else's credit card, which can help you build credit without taking on the full responsibility of the account.

What type of loans can you get to build your credit?

These types of loans can help you build credit:

  • Credit builder loans. These loans are specifically designed to help you build credit. They are generally small loans that you will pay back over a period of six to twelve months. The payments you make will be reported to the credit bureaus, which can help improve your credit score.

  • Secured personal loans. A secured personal loan requires collateral, such as a car or savings account. Because the lender has collateral to use as a backup, they may be more likely to offer loans to people with poor credit. Just like with a credit builder loan, making regular payments on a secured personal loan can help build your credit.

  • Co-signed loans. If you have someone with good credit who is willing to co-sign a loan for you, you may be able to get a loan with better terms. However, keep in mind that if you miss a payment or default on the loan, it will negatively affect both your credit and the credit of the co-signer.