Do you have a poor credit score? Or perhaps little to no credit history at all? Are you looking to establish good credit so that you can take out loans with low-interest rates? Then you need a credit builder loan. The Republic Bank, Self, and Metro Credit Union are some of the top financial institutions that offer the best credit builder loans.
What is a Credit Builder Loan and How Does it Work?
A credit builder loan is a type of loan that can help you build a good credit history without using a credit card. Also known as “fresh start loans” or “starting over loans,” credit builder loans may not require a credit check. Instead of evaluating your credit report, creditors may go through your banking history, instead. If approved, the Consumer Financial Protection Bureau states you can typically borrow cash of between $300 to $1,000.
Unlike traditional loans wherein you get the money first before you make payments, the best credit builder loans require the borrower to make payments first before receiving the funds. The creditor will place the money in your chosen savings account. You’ll have to repay the loan plus the interest rate over a period of time, usually over 6 to 24 months before you can access the money. With this type of loan, you’ll be building your credit history and saving money at the same time.
Why Get a Credit Builder Loan?
A credit builder loan is ideal for people who lack a credit record or have a thin or outdated credit history. By building good credit through this type of loan, you’ll have access to various credit products and qualify for low-interest rates.
A Consumer Financial Protection Bureau report showed that the best credit builder loans may help people without credit history or those with no outstanding debt to establish a good credit record. Out of 1,531 credit union members who were offered this type of loan, 24% of those who had no existing loan showed positive signs of improving their credit scores. Their credit scores rose by 60 points more than other members who had existing loans.
What are the Top Institutions Offering Credit Builder Loans?
Offers a credit builder program that lets you borrow money from $300 to $1,500 with an APR ranging from 5.373% to 8.055%. The proceeds will be placed in a certificate of deposit and this will earn interest as you make repayments. You can choose to pay it off between 12, 18, and 24 months. You can withdraw your money once you make the final payment.
Credit builder loans, ranging from $500 to $3,000, are deposited into a Metro Savings Account while earning dividends. Depending on the amount you borrow, your APR can be as low as 4.10%, and you can pay it off up to 24 months.
You can borrow up to $3,000 with an APR of around 5%. The funds will remain in your DCU Savings account and earn dividends until you have made the final payment on the loan.
Formerly known as Self Lender, it offers credit builder loans between $576 and $1,800 for loan terms of 12 to 24 months. Self’s lowest APR is 15.65%, which is significantly higher than other financial institutions offering credit builder loans.
How Does this Type of Loan Affect Your Credit Score?
Your creditor will report your loan payments to at least one of the three major credit bureaus: Equifax, Experian, TransUnion. You have to make timely payments if you want your credit report to show that you’re a responsible and trustworthy borrower.
The credit scoring models used by FICO and VantageScore take into account your payment history. That includes payments made on your credit cards, student loans, home loans, car loans, secured loans, and credit builder loans. If you pay your credit builder loan on time, it will help you improve your credit score. Lenders will see this as a positive sign that you can pay off your loan.
But before you take out this type of credit, you need to make sure that the creditor will report your payment history to the credit bureaus. Choose a creditor that reports to major bureaus so that you’ll receive similar credit scores from all of them.
You also need to remember that credit builder loans can also hurt your credit report. If you fall behind on your payments, the creditor will also report this to the credit bureaus. So, be careful when choosing a loan amount. Consider taking out a small credit builder loan if you’re on a tight budget so that the monthly payments won’t be a burden.
Where Can You Get a Credit Builder Loan?
- Credit Unions. A credit union is a non-profit financial organization that offers savings and checking accounts, as well as loans including credit builders. To find a credit union in your local area, you can ask your employer, school, or use the National Credit Union Administration’s locator tool. But you have to be a member of the credit union to qualify.
- Community Banks. A community bank is a financial institution that serves individuals and businesses in a small area. Community banks lend the deposits they receive to local borrowers in the form of loans, including credit builder loans. Find a community bank near you through the Independent Community Bankers of America's search tool.
- Finance Companies. Some finance companies like Self offer credit builder loans.
- Lending Circles. Some groups of people offer loans to their members to help build credit. Find a lending circle in your area offering unsecured credit-builder loans through Mission Asset Fund’s database.
What are the Requirements to Secure a Credit Builder Loan?
When you apply for a credit builder loan, you have to prepare the following documents:
- Employment details
- Proof of income if employed
- Tax returns if self-employed
- Check and savings account balances
- Housing payment history
- Other loan balances
- Personal references
What Should You Consider when Applying for a Credit Builder Loan?
Just like other types of credit, there are some factors you need to consider before taking out a credit builder loan with no credit check. These are:
- Loan size – How much can you afford to pay without falling into undue financial hardship?
- Loan fees – Do you need to pay a fee when setting up an account?
- Interest Rates – What is the interest rate? Will you get a portion of the interest rate back once you pay off the loan?
Steps to Get Approved for a Credit Builder Loan
- Look for financial institutions that offer the best credit builder loan.
- Make sure that the creditor reports payment history to all major credit bureaus.
- Decide on the loan amount.
- Compare the interest rates and loan terms offered by prospective creditors.
- Choose a creditor that offers favorable loan terms.
- Apply for a credit builder loan.
- Submit a copy of all the required documents.
- Wait for the loan approval.
What are the Other Ways to Rebuild your Credit?
If you feel that a credit builder loan is not for you, here are the alternatives you can check out.
1. Secured Credit Card
Secured credit cards are made for consumers that lenders consider as high risk. These are people who have a thin credit file, bad credit, or no credit history at all.
To mitigate the risks, creditors and lenders will require collateral in exchange for a secured credit card. When you open a credit account, you will be asked for a refundable security deposit, which usually serves as your credit limit. You will lose your security deposit if you fail to pay off your debt. You can apply for a secured credit card at financial institutions like banks and credit unions.
Pros
- A good alternative to traditional credit cards
- Payment histories are reported to credit bureaus
- Helps in building or rebuilding credit
- Unpaid debt won’t be sent to a collection agency unless the balance is higher than the security deposit
Cons
- It may be difficult to get the required security deposit
- It may come with higher interest rates
- You may need to pay other fees, such as application fees, annual fees, and processing fees
2. Authorized User
Becoming an authorized user of a credit card with good payment history is another way of building or rebuilding your credit. You have to choose someone who has good borrowing habits because their payment history will appear on your credit report.
Pros
- Builds your credit
- No need to apply for a new credit card
Cons
- Your credit score will take a hit if the primary account holder defaults on payments
- Relationship problems if the arrangement doesn’t work
- Not all creditors report authorized user accounts to major credit bureaus
3. Secured Loan
A secured loan requires you to pledge an asset as a security for the amount you wish to borrow. It can be in the form of cash, real estate, vehicle, or investments. Offering collateral makes the loan less risky for lenders because if you default on payments, they will repossess the asset to recoup their losses. Secured loans can make or break your credit report. So, before you take out this kind of loan, you need to be sure that you can pay it off on time.
Pros
- Lower interest rates
- Bigger loan amount
- Better loan terms
- Excellent credit builder
Cons
- Possible loss of asset if you default
- Damage to your credit report if you fail to pay on time
Conclusion
The best credit builder loans can help build your credit. Aside from that, you’re building your savings, too, since you need to pay off the loan first before you can access the money. It’s a good option if you have no credit history or have a thin credit file. It doesn’t require a credit check, but you do have to prove that you have the capacity to pay.
Aside from a credit builder loan, there are other ways to help you build your credit. You can apply for a secured credit card, to be an authorized user on a credit card, or go for a secured loan. Don’t forget to practice good borrowing habits, and you’ll see significant improvements in your credit report.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
