If you have poor credit, you might find yourself in a Catch-22: You want to improve your score but don’t have the income or funds to do so. For example, you might want to use a secured credit card to improve your credit but be unable to afford the security deposit.
That’s where credit builder loans come in handy. Like other financial products, they can help increase your credit score.
Here’s how credit builder loans work and your best options if you need to get one.
How credit builder loans work
Credit builder loans, sometimes called “fresh start loans,” are typically small personal loans for about $500 to $1,000. You make monthly payments with interest over about six months to two years. These payments are reported to the credit bureaus and, if made on time, can improve your credit score.
Although credit builder loans function much like any other loan, there’s one major difference. To limit risk, the lender puts the money you borrow into a savings account, which you can only access once the loan is paid off.
However, you could also try using a traditional secured personal loan or unsecured personal loan to build credit.
A secured loan requires you to put up collateral, such as savings or property. If you fail to repay the loan, the lender keeps the collateral. However, your rates could be lower than with an unsecured loan.
With an unsecured loan, you don’t have to offer collateral. However, you might pay higher rates or not qualify for the loan if you have poor credit. If you do qualify, you’ll get the money you borrowed upfront.
Before applying, be clear about your intentions for getting the loan in the first place. Ask yourself if you need money to pay for something or just want to build your credit score.
Where to find credit builder loans
Credit builder loans can be hard to find. However, you can often find them at community banks, credit unions, or nonprofit organizations.
National banks might not offer credit builder loans, but you could find secured personal loans. If you’re looking for a financial product specifically tailored to help build your credit, though, get in touch with local banks.
Sunrise Banks in Minnesota, for example, has a credit builder program where you can borrow up to $1,500. That money is placed into a certificate of deposit (CD), which earns interest as you pay back the loan.
Once the loan is repaid, you get the money in full. You’ll also earn a refund of 50% of the total interest you paid on the loan if you made all your payments on time. The bank also says that it’ll report your loan payment history to Experian, Transunion, and Equifax.
Programs vary depending on the bank, but this is an example of how local banks help their communities with credit builder loans.
Like a local bank, credit unions are community-based financial institutions. But they’re owned and operated by their members, so they don’t have any obligation to stockholders. This community focus means these organizations are keen to help locals grow a positive financial portfolio.
For example, 1st Financial Federal Credit Union in Missouri offers credit builder loans for up to $1,000, which you pay back with interest over 12 months. Your payment history is shared with the credit bureaus, and you’ll get 50% of the interest you paid refunded if you made on-time payments.
Do your research to see what credit unions are available in your area and if they offer similar credit builder loans.
All over the country, there are nonprofit organizations with the goal of helping people rebuild their credit.
Consumer Action is a nonprofit advocacy group that offers resources to help you build credit. It also offers tips for filing your taxes, protecting your identity, identifying scams, and more. Resources such as this one can help you develop positive habits for managing your finances.
Some companies are seeing the value of bringing credit builder loans to the masses by offering them online. Self Lender, for example, works with Lead Bank and Sunrise Banks to offer such loans in all 50 states.
You can take out a small loan with a 12- to 24-month term. The money you borrow is put into a CD, which earns interest. After paying off the loan, you get your money from the CD.
The program is similar to those you might find at your local bank or credit union. However, if you don’t have access to a credit builder program in your community, an online lender is a great resource to turn to.
Know the pros and cons of credit builder loans
While credit builder loans vary by state and financial institution, each is intended to help you build a positive credit history. As these personal loans were created for people with bad credit, you’ll be more likely to qualify. You might also find that the interest rates tend to be lower than those found on a credit card or personal loan.
However, you can’t access the money you borrowed until you’ve paid off the loan. This isn’t helpful if you’re in dire need of cash.
Remember: This is just one way to rebuild your credit. You can also review your credit report to check for errors affecting your score or reduce your expenses and then put the savings toward debt. Debt consolidation companies can also help you better manage your payments.
Each of these strategies can boost your credit score and put you on the path toward financial success.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|