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What is a credit starter loan?
Credit starter loans are a type of financing that allows people without a credit history to take out the first loan to build credit. A good credit score is one of the most important requirements when applying for a personal loan or rental housing. Young people who want to build their credit can use credit starter loans for this. This loan offers small amounts of debt for young people with a stable source of income. Starter loan also allows people with bad credit to rebuild their credit.
It is also possible to include business startup loans in this category, as they allow a small business owner to build credit. Many lenders require a 2-year experience in the business from a small business owner, so this loan is suitable for the owner of a startup business.
Major types of starter loans
- Personal starter loan. Personal credit starter loans help young people build credit. Usually, the maximum loan amount for this type of loan is $1,000. The maximum repayment term can be 12 months. This loan is suitable for young people from 18 to 21 years old who are building their loans to apply for a more serious loan in the future, such as a mortgage. Credit starter loans can also help people with bad credit to increase their credit scores. This loan may or may not require collateral, depending on the lender.
- Small business startup loan are loans that are issued for small business owners who have little business experience. This loan allows a small business to start development, expand and increase cash flow. Such financing category includes SBA loans, crowdfunding, and microloans. Business loans come in different loan amounts and interest rates, and borrowers can get a financing for equipment, rent, or cover the payments for employees.
How to apply for starter loans
Since a starter loan is designed for people without a loan, this type of funding does not require a good credit history to qualify. Therefore, there is no requirement for a good credit score either. However, a small business owner must have a minimum of 600 credit scores to qualify for a startup loan. The age of the borrower is important for this loan. It is important not only that the borrower must be 18 years old, but they must also be no older than 21 years old. This applies only to a starter loan for an individual and not to a business startup.
In the case of a business startup loan, the borrower may require a little business experience, usually no more than six months. The startup should work for several months, as the lender wants to make sure that the borrower will pay off the loan and properly dispose of it. The application process is simple. The borrower can come to the office in person or apply online. To submit an online application, the borrower needs to go to the lender's website and click Apply or Get Started.
- In the application form, there are fields to fill in with personal information, like name, phone number, email, SSN, and date of birth.
- The borrower needs to enter data about employment, such as the employer's name, company name, and employer's phone number.
- Income information, such as the source of income and the amount of income, is also needed.
Filling out the application takes about 15 minutes. The application procedure may require borrowers to upload additional documets. To confirm the identity of the borrower, an online lender may require a driver's license, state-issued ID, passport, certificate of citizenship, birth certificate, or military ID. To prove employment and income, the borrower may need to provide paystubs, tax returns, W-2s and 1099s, and bank statements.
Ways to pay starter loans back
There are several payment methods for a starter loan. Different lenders offer different ways. Also, the payment method is individual because a different method will be convenient for each borrower.
- Online payments. Some online lenders offer online payments through the company's website or mobile application. With this method, the borrower can make payments from a checking or savings bank account or debit card. The Lender does not charge a commission for payment in this way.
- Cash. The borrower can come to the offline lender store and pay the loan in cash. This method is not convenient for everyone, since some lenders have only a few stores in a limited number of states. Usually, lenders do not set commissions for cash payments.
- Military allotment. Young people often serve in the US Army under contract. The payment system using military allotment allows the borrower, an active servant of the army, to make payments on the loan automatically from military paychecks.
- Automatic payments. Many lenders recommend this type of payment for borrowers. Automatic monthly payments are withdrawn from the checking or savings bank account of the borrower using ACH debit. This type of payment does not require commissions and allows the borrower not to follow the payment calendar and not be late with payments.
Legal regulations of starter loans
Starter loan is regulated by the Consumer Financial Protection Bureau. Therefore, this type of loan is subject to the regulation of the FDIC and Fair Housing Law. When choosing a lender, the borrower should pay attention to the postscript "Member FDIC" and "Equal Housing Lender" to the company name, since this means that the lender is subject to legal regulation and is trusted.
The true cost of starter loans
In addition to the loan amount, the borrower still has to pay interest, origination fees, and prepayment fees. The APR for this loan starts at about 11%. The origination fee is a fee for the company's service. This fee can vary from 1 to 10%, depending on the lender. Prepayment fees are penalties for early loan repayments or early repayment. Usually, lenders do not charge this fee to clients.
