How to Build Your Credit With a Credit Builder Loan

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.

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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.

Banks

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.

Credit unions

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.

Nonprofit organizations

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.

Online

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!
LenderRates (APR)Loan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal LoansFixed rates from 6.58% APR to 14.87% APR (with AutoPay). Variable rates from 6.275% APR to 12.575% APR (with AutoPay). SoFi rate ranges are current as of July 16, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.275% APR assumes current 1-month LIBOR rate of 2.10% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

2 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

  • Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  1. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  2. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.
7.73% – 29.99%$1,000 - $50,000
Check rate nowon SLH's secure site
6.28% – 14.87%1$5,000 - $100,000
Check rate nowon SLH's secure site
6.87% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%$5,000 - $35,000
Check rate nowon SLH's secure site
4.99% – 29.99%$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%2$5,000 - $50,000Visit Citizens
15.49% – 34.49%$2,000 - $25,000Visit LendingPoint
5.99% – 35.89%$1,000 - $40,000Visit LendingClub
5.49% – 18.24%$5,000 - $75,000Visit Earnest
9.95% – 35.99%$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.