A credit-builder loan is a type of personal loan designed to help individuals build credit, especially those with limited credit history or poor credit. Unlike traditional loans, credit builder loans don't provide you with an upfront lump sum. Instead, the loan amount is held in a savings account or a credit-builder account while you make monthly payments. These monthly payments are reported to the three credit bureaus, helping to build a positive credit history over time.

Features

1. Purpose. Credit builder loans are specifically designed for building credit, especially for individuals with low credit scores or limited credit history.

2. Structure. Unlike a traditional loan, you don't receive the loan amount upfront. Instead, the funds are held in a savings account or a credit-builder account until the loan term is completed.

3. Loan Payments. You make regular monthly payments, which are an important factor in improving your credit score. All the payments you make are reported to the major credit bureaus.

4. Payment History. Making on-time payments is crucial. Consistently making payments on time helps build a positive payment history, which significantly impacts your credit scores.

Pros and Cons

How to Apply for a Credit-Buiding Loan?

1. Explore Potential Lenders. Look into various lenders such as credit unions, community banks, and online lenders that offer credit builder loans. Compare their loan offers, interest rates, and terms to find the best fit for your financial goals.

2. Choose a Loan Amount You Can Manage. Determine a loan amount that you can comfortably afford to repay. Remember that the loan amount will be held in a savings account or credit builder account until the end of the loan term.

3. Gather What You Need to Apply. Prepare the necessary documentation for your application. This may include identification, proof of income, and details of any existing debt. Some lenders may not require a credit check, which is beneficial for those with lower credit scores.

4. Understand the Terms and Conditions. Carefully review the loan terms and conditions, including the annual percentage rate (APR), loan term, and any fees associated with the loan. Make sure you understand how the credit builder loan works, including the importance of making on-time payments.

5. Submit the Application. Fill out the application form with accurate information and submit it to your chosen lender. If you're applying through a credit union, you may need to become a member first.

6. Start Making Payments. Once approved, begin making payments as per the agreed schedule. It's crucial to make all the payments on time, as the lender reports your payment history to the major credit bureaus, which helps build your credit scores.

Best places to borrow a loan with bad credit

Upgrade

Upgrade is a prominent online lender that offers personal loans to borrowers with bad credit. They provide loan amounts ranging from $1,000 to $50,000, making them suitable for various financial needs. The minimum credit score required by Upgrade is relatively low, typically around 580. This makes it accessible to individuals with a less-than-stellar credit history. One notable advantage of Upgrade is its flexible repayment terms, which can extend up to five years. This longer repayment period allows borrowers to manage their monthly payments more effectively. However, it's worth noting that Upgrade charges origination fees ranging from 2.9% to 8%. Additionally, while they do not have any prepayment penalties, borrowers should be aware of the interest rates, which can be relatively high for individuals with bad credit.

Upstart

Upstart is another online lender that specializes in providing loans to borrowers with bad credit. Their loan amounts range from $1,000 to $50,000, allowing borrowers to access the funds they need for various purposes. Upstart utilizes a unique underwriting model that takes into account factors beyond just credit scores, making it more inclusive for individuals with limited credit history or low credit scores. The minimum credit score required by Upstart is typically around 580. One of the significant advantages of Upstart is its soft credit check, which means that applying for a loan does not negatively impact your credit score. Repayment terms offered by Upstart range from three to five years, providing borrowers with flexibility. While they do charge origination fees of up to 8%, it's important to note that they don't impose any prepayment penalties. However, borrowers with bad credit should expect higher interest rates.

LendingPoint

LendingPoint is a bad credit lender that offers personal loans ranging from $2,000 to $36,500. They consider borrowers with credit scores as low as 585, making them accessible to individuals with bad credit. LendingPoint prides itself on providing fast funding, often disbursing funds within one business day. Their repayment terms typically range from two to four years, allowing borrowers to tailor their loan duration according to their needs. It's important to note that LendingPoint does charge origination fees that can be up to 6%. They also have a slightly higher interest rate compared to traditional lenders, which is to be expected when borrowing with bad credit. However, they do not impose any prepayment penalties, enabling borrowers to pay off their loans early if they desire.

Universal Credit

Universal Credit is an online lender that specializes in bad credit loans, offering loan amounts ranging from $500 to $15,000. Their minimum credit score requirement is relatively low, typically around 550, making them accessible to borrowers with poor credit. Universal Credit offers repayment terms ranging from six months to five years, allowing borrowers to choose a duration that aligns with their financial situation. While they charge origination fees, the amount may vary based on the borrower's creditworthiness. One notable advantage of Universal Credit is its willingness to consider applicants who have previously filed for bankruptcy. However, borrowers should be aware that the interest rates associated with bad credit loans from Universal Credit may be higher compared to traditional lenders.

OneMain Financial

OneMain Financial is a well-established lender that specializes in bad credit loans. They offer loan amounts ranging from $1,500 to $20,000, making them suitable for various financial needs. OneMain Financial requires a minimum credit score of 600, slightly higher than some of the other lenders in this category. However, they have a reputation for considering other factors beyond credit scores when evaluating loan applications. OneMain Financial provides repayment terms that range from two to five years, allowing borrowers to select a term that fits their budget. It's important to note that OneMain Financial charges origination fees, which can vary depending on your residence state. While they do not disclose their interest rates upfront, borrowers with bad credit should expect higher rates.

Avant

Avant is an online lender that specializes in offering personal loans to individuals with bad credit. They provide loan amounts ranging from $2,000 to $35,000, catering to various financial needs. Avant has a minimum credit score requirement of 580, making them accessible to borrowers with less-than-ideal credit histories. Repayment terms offered by Avant typically range from two to five years, giving borrowers flexibility in managing their monthly payments. While Avant charges origination fees up to 4.75%, they do not impose any prepayment penalties. It's important to note that Avant's interest rates can be relatively high for borrowers with bad credit. However, they provide a transparent prequalification process that allows borrowers to check their potential loan offers without affecting their credit scores.

Requirements and Conditions

Requirements

1. Personal Identification. You will need to provide valid identification, such as a driver's license, passport, or state ID.

2. Income Information. Lenders will require information about your income to assess your ability to make the monthly loan payments. This may include pay stubs, tax returns, or bank statements showing regular deposits.

3. Employment Status. You will need to provide details about your employment status. This can include the name of your employer, your job title, and the length of time you've been employed there. If you're self-employed, you may need to provide additional documentation, such as business bank statements or tax returns.

4. Bank Balances. Some lenders may request information about your bank balances to ensure that you have sufficient funds to manage the loan payments. This can include recent bank statements from your checking or savings accounts.

Conditions

1. Loan Amounts. Credit-builder loans generally come in increments ranging from $300 to $1,000. These small loan amounts are designed to make the loan manageable and to help you build credit without taking on excessive debt.

2. Loan Terms. The terms of credit builder loans typically range from six to 24 months. This period allows sufficient time to establish a positive payment history, which is essential for improving your credit scores.

3. Annual Percentage Rate (APR). The APR for credit builder loans usually ranges from 6% to 16%. The exact interest rate can vary depending on the lender, your financial situation, and the specific loan terms.

Ways to Receive the Money

You generally do not receive the borrowed amount upfront with credit builder loans. Instead, the loan amount is typically held in a savings account or credit builder account by the lender throughout the loan term.

At the end of the loan term, once you have successfully made all the required payments, you will then receive the borrowed amount. This process is different from traditional loans, where you receive the funds upfront and repay them over time.

Things to Pay Attention To

1. Payment History. Making on-time payments is crucial for building credit. Missed payments can negatively impact your credit scores and set you back financially. Ensure that you make all the payments on time to establish a positive payment history.

2. Loan Terms. Understand the loan terms, including the loan amount, loan term, and annual percentage rate (APR). Knowing the terms helps you manage the loan effectively and budget for monthly payments.

3. Lender Reports. Ensure that the lender reports your payment history to the major credit bureaus. Lender reports are essential for building credit as they document your responsible financial behavior and contribute to your credit scores.

4. Security Deposit. Some credit builder loans may require a security deposit, especially those tied to a secured credit card. Understand the terms related to the security deposit and ensure that you can afford the upfront deposit if required.

5. Financial Goals. Align the credit builder loan with your financial goals. Whether you aim to build credit, improve your credit scores, or qualify for other financial products in the future, ensure that the credit builder loan serves your long-term financial objectives.

Reasons for Getting Rejected for a Credit-Buiding Loan

1. Credit Limit. If you have reached or exceeded your credit limit on existing credit cards or loans, lenders may view you as overextended and reject your application for a credit builder loan.

2. Inaccurate Information. Errors on your credit report, such as incorrect personal information or account inaccuracies, can affect your credit scores and lead to rejection for a credit builder loan.

3. Unstable Income. Lenders may reject your application if you have unstable or inconsistent income, as it may indicate an inability to repay the loan.

4. Recent Bankruptcy or Foreclosure. If you have a recent bankruptcy or foreclosure on your credit report, lenders may be hesitant to extend credit to you and may reject your application.

5. Legal Issues. Legal issues such as liens, judgments, or outstanding collections can negatively impact your creditworthiness and lead to rejection for a credit builder loan.

How to Repay a Credit-Buiding Loan?

1. Understand Payment Terms. Familiarize yourself with the payment terms of your credit builder loan, including the loan amount, loan term, and monthly payment amount. Understanding these terms helps you plan and budget for repayment.

2. Set Up Automatic Payments. Consider setting up automatic payments from your bank account to ensure timely repayment of your credit builder loan. Automatic payments can help you avoid missing payments and damaging your credit.

3. Make On-Time Payments. It's crucial to make all payments on time to build a positive payment history. Missed payments can negatively impact your credit scores and defeat the purpose of the credit builder loan. Set reminders or alerts to ensure you never miss a payment.

4. Track Your Progress. Monitor your repayment progress regularly. Keep track of your payments and check your credit reports periodically to ensure that your payment history is accurately reported to the credit bureaus.

5. Plan for Early Repayment. If possible, consider paying off your credit builder loan early. Early repayment can help you save on interest and improve your credit scores faster. However, check the loan terms to ensure there are no penalties for early repayment.

Editorial Opinion

Important

How to Choose a Lender

1. Make sure to confirm whether the lender is licensed to operate in your state. You can verify this information with your state regulator or attorney general.

2. Check if the lender is a member of a reputable association, such as the Community Financial Services Association of America. Membership in such organizations may provide an extra level of reliability.

3. Carefully review all the terms and conditions of your payday loan contract.

4. Thoroughly examine the interest rates on payday loans and ensure that your contract includes a detailed breakdown of the total cost of the loan.

5. Take advantage of your right of rescission. Usually, you can rescind the loan within three days after signing the agreement. Alternatively, there is typically a "cooling-off" period, which allows you several days to thoroughly review the contract before making an informed decision to enter into a consumer loan agreement based on the terms specified by the lender.

6. Choosing a payday lender is a significant decision that demands careful consideration and a good understanding of how such organizations operate.

Additional Resources

• What Credit Score Do You Need for a Personal Loan?
• How to Get a Personal Loan in 7 Steps
• Personal Loan Pre-Approval
• How to Apply for a Personal Loan
• Personal Loan vs Personal Line of Credit