mp
Arrow

Credit Builder Loans – Do They Really Help?

Author image
Len Penzo
Credit Builder Loans – Do They Really Help?

A credit builder loan is designed to help you repair and build credit scores. One of the best personal loans options, it is often referred to as an unsecured credit builder loan due to the absence of collateral need to secure the loan.  While you can also get a secured credit card to build the credit score, availing a credit builder loan helps you increase your savings while developing your credit score.

To explore the possibilities of developing a strong credit history or improving a weaker credit score, begin by understanding the best credit builder loan terms, rates and conditions to determine the most appropriate strategy for building up your credit.

What is a Credit Builder Loan

The process of using loan money to improve a credit score by holding it in an account while you make regular payments is referred to as a credit builder loan, fresh start loan or starting-over loan. It is a legitimate alternative for borrowers with bad credit, no credit or even weaker credit. You can also consider a secured loan to build credit, but it’s riskier than the unsecured option.
When you do not have a good credit score, most lenders will refrain from offering loan or prevent you from accessing the best available terms. With a credit builder loan, you can build your credit history so that you can access the necessary financial help when you really need it.

How Exactly Does A Credit Builder Loan Work

Offered by banks, credit unions, registered lenders and Community Development Financial Lenders (CDFIs), credit builder loan companies help with constructing your credit score from the ground up even if you don’t have a history yet.

  • Once your credit builder loan is approved, the lender transfers the total amount to a bank account used by the lender. You are not given access to this account.
  • Borrowers pay regular premium payments, which includes the set interest rate and principal amounts. 
  • Once your loan is completely remunerated, the lender transfers the loan amount to your account.
  • Your payment history (record of loan payments) is then forwarded to the credit bureaus by the lender.

Can Credit Builder Loans Raise your Credit Score?

Fresh start loans are explicitly designed to help improve your credit score. If you pay the premium payments including the interest amount on time without fail, your credit score will strengthen thanks to regularly reported on-time payments to credit bureaus. Simply put, the ups and downs of your credit score accompanying the use of a credit builder loan is solely dependent on your repayment timeliness.

You will notice positive developments on your credit history when the lender starts sending your payment records to credit reporting organizations on a regular basis. Nevertheless, late payments can impact your FICO scores heavily if you’re starting from scratch.

How Can You Access A Credit-Builder Loan?

While the eligibility requirements of loan service providers vary by lender, there are general conditions that borrowers must satisfy to apply for a credit builder loan.

  • Select a Loan Provider: Crosscheck if they will send your payment history and credit reports to the primary three customer credit bureaus- Equifax, Experian and TransUnion.
  • Decide on a Loan Amount: Depending on the lender, the minimum and maximum loan amounts might differ. Typically, you can access $300 to $1000 for a credit builder loan.
  • Compare Multiple Lenders: It is recommended that borrowers compare interest rates including APR, monthly repayment premiums, lender’s fees, origination fees and repayment duration of the lender before finalizing a credit builder loan.
  • Send Your Application: Complete the loan application form by including your name, address and contact details. Your credit score is not required here as it is not a deciding factor for approving credit builder loans.

Keep in mind that you will not get the loan immediately after your application is approved. It will be disbursed to you when your credit builder loan is paid off in full.

What is the Cost of Getting a Credit-Builder Loan?

The deciding factors of a credit builder loan are solely determined by the lender based on the information you provide. Moreover, the total cost of the loan is not limited to one parameter, but all of the following.

  • Annual Percentage Rate: APR is the rate charged by the lender in order to disburse the funds to you. The average APR of credit-builder loans starts from 10%.
  • Interest Costs: Fresh start loans are provided by lenders who might keep the total interests paid by you in full or half.
  • Regular and Extra Fees: Lenders which offer credit builder loans can charge a range of fixed and variable fees such as application fees to late payment penalties.
  • Loan Tenure: Depending on the total time frame you choose to complete paying back the loan, the interest charges might inflate your total loan costs.
  • Wrong Loan Amount: Based on your choice of loan amounts, you might end up paying more interest in case of excess loan amounts or fall into debt with insufficient funds.

Choosing the right lender after reviewing their terms and conditions regarding credit-builder loans will ultimately help you improve your credit score without breaking your budget.