Credit Builder Loan

What is a Credit Builder Loan? 

Trouble building a credit history or struggling in rebuilding your credit score? Credit builder loans are a good source of displaying your ability to make payments on time. These credit builder loans are a kind of personal loan solely meant to help borrowers improve their credit scores.

These loans aren’t your traditional loans where you receive loan proceeds and then repay the balance over time. Alternatively,  a credit-builder borrower makes fixed payments each month into an account, and when the loan terms end, they get the money back. Sometimes this money comes back with interest paid, minus the fees.

To demystify what credit-building loans are, let this blog walk you through to explain how they work, where to find one, and how to apply for them.

How A Credit Builder Loan Works

Credit-builder loans are considered the opposite of what a traditional loan is. A credit builder loan holds your money in a savings account or as a CD – certificate of deposit, in the borrower’s name until you repay the loan, instead of a lender paying out lump sums of money to the borrower at the start of the loan term. 

Typically the borrower in a credit builder loan is not paid upfront but still gets charged with an APR – annual percentage rate that usually falls between 6% to 16%. The borrower makes fixed payments each month against the interest and principal of the loan for building a strong history of payment.

The term’s course is usually extended between 6 months and 24 months, where the lender keeps reporting to the credit reporting agency about the borrower’s payment history. This reporting helps in building positive credit reports. 

Usually, loans with bigger credit limits that are repaid quickly help boost the credit scores more. This timely payment shows the borrower’s credibility of how good they are at managing more debts. When a borrower makes On-time payments, it increases their scores, while late payments make a great impact on the borrower’s score, as well.

When the loan term ends, all the collected funds are let go for the borrower. The borrowers sometimes get a portion of the interest paid back.

Since the lenders don’t disperse any money at the start of the loan term, the chances of high risks decrease compared to a traditional form of personal loan. This credit builder loan structure makes things a little easier for those with bad credit history to access a good credit-building loan.

What Is The Process To Get A Credit Builder Loan

If you find a credit-builder loan a good fit for your financial management, then follow the steps mentioned below to get your credit-building process started.

Identifying The Lenders

Credit-builder loans are not every lender’s preference, so the first step is identifying the lenders who offer these loans and have the will to help out. You can start looking for them in your community or even online. You can also contact the local banks, credit unions, or an online prover, Self or USALLIANCE Financial.

Determine The Amount of Money You Want to Borrow

In a typical traditional loan, you must consider how much money you must borrow to meet your expenses. On the contrary, you consider how much money you can commit to your loan account in a credit-builder loan. It can also determine how much improvement you want in your credit score. These credit-builder loans generally range from $300 up to $3,000. You need to ponder and review your budget before committing to a loan amount and paying each month.

Look For the Best Loan Terms

The terms and conditions of Credit-builder loans may differ from one lender to another, depending on the borrower’s income and on creditworthiness, but do keep in that they favor borrowers with low credit scores. Generally, a 6% to 16% APR is charged. If you have to consider a lender, check if they offer a pre-qualification contract that allows you to check your rate, minus a hard inquiry for credit.

Lenders can also charge fees, including administration costs or late payments charges. Don’t forget to check your lender’s policies before signing the contract to avoid hidden terms or future inconveniences. 

Try to sign a contract with lenders who report to Equifax, Experian, and TransUnion, the credit bureaus. It will ensure that you get the maximum benefits from your credit builder loan for making timely payments.

A Formal Application Submission 

When you are done deciding which lender you want to sign papers with a lender, it’s time for you to collect all the necessary documents and get familiar with their loan application process. Often, the documents include your contact information, identification, and proof of income. However, these requirements may vary from one lender to another.

Making Timely Payments

Once your credit building loan approves, make sure you know when your first payment is due. Understand the process of how the payment is going to be submitted. These details will help you improve your credit score through your credit builder loan because it’s really important to make on-time payments according to the terms and conditions of the loan.  

How To Look For A Credit-builder Loan

A credit-builder loan is not as common as traditional personal loans are. However, you have the chance to find one that fits best for you via:

If you know any local community banks or a bank with a credit union, or any other financial local organizations, ask your banker to check if they have any credit builder loan facility available for you to apply for. Otherwise, you can look for other independent local lenders on online credit builder loan services in your city or state.

CDFIs – Community Development Financial Institutions, work on providing financial services for people with low income in the community. These CDFIs are private financial organizations specifically helping people at a financial disadvantage make a good living out of what they can earn. The easiest way is to find the nearest CDFI, visit their Community Finance Network’s CDFI locator or even inquire about a bank.

Lending circles are also an effective way for credit building loans. It is a group of people who join together to lend money to each other each month. Generally, it’s a group of 6 to 12 people who pay monthly, and each month a different person receives the loan money. 

A loan is a form of formal lending circle like those supported by Mission Asset Fund, which reports to credit bureaus; this will be a great option to get started with credit-building loans.

Online lenders specializing in building creditworthiness are also an excellent option for your credit builder loan. These online forums are another form of community-based lending option where borrowers can get their credit scores improved without getting into any hassle. 

The Final Thoughts

Credit builder loans help improve and build savings momentum all at once. Since the loans are provided and approved by the local community banks and credit unions most of the time, they give you a chance for local banking only if you are interested in it. These credit builder loans help you achieve heights in financial management if you always find your credit reports running thin.

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