Is building credit really worth taking out a personal loan? The short answer is yes, and no.
Which answer you land on will depend on what you use the money for, how much you borrow, and how you manage the loan going forward.
When it’s time for you to shop around for credit building loans, consider the following before making a final selection.
1. Don’t borrow the money for just anything
It’s never worth taking on new debt just for the sake of building credit. So whatever you do, don’t spend the money from credit building loans on something you do not need.
The best things do with a personal loan
Pay off high-interest credit cards. In this way, one debt eliminates the other. The personal loan is new, but the debt amount essentially stays the same.
High-interest student loans can be good bets for credit building loans too, but only if you’ve done your homework.
For instance, if you use a personal loan to pay off federal student loans, you lose federal protections. So if there comes a time when you’re struggling to make your personal loan payment, you no longer have the option of income-driven repayment plans, forbearance, or deferment.
The worst thing to do with a personal loan
Spend it on unnecessary things or experiences like clothes, a vacation, or a brand new car when you already own one that’s in good shape.
Now, if you really do need a car, a personal loan might be a great idea, especially if you need it now and don’t have the cash on hand to buy it outright. You’re probably going to find a better deal on a personal loan through a bank than by financing through the dealership.
2. Shop around for credit building loans
The best personal loan probably isn’t going to show up in your mailbox or in a targeted online ad.
Instead, the best personal loans to build credit are found when you seek them out and do a side-by-side comparison.
Things to look for in credit building loans
- Eligibility requirements like credit score, payment history, and income
- Borrowing limits
- Length of the loan
- Interest rates
- Origination fees
Check out the table to compare two of the best online personal loan lenders.
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|
3. Borrow as little as possible
One of the principal building blocks of good credit is staying out of debt.
So if you want a personal loan to help you build your credit, the last thing you want to do is borrow more than you need. That will just keep you in debt longer.
Do the math – taking into account the origination fee – and only ask for that amount for your credit building loans.
4. Automate your payments
As much as a personal loan can help your credit, all it takes is one late payment to make things worse.
After all, what you’re trying to prove with a personal loan is that you can handle credit responsibly. Paying your bills on time is the most important part of credit building loans.
Make sure you make your loan payments–on time, every time–by setting up automatic loan payments through your bank account.
5. Avoid racking up new debt
When you use a personal loan to pay off credit cards, you’re not out of the woods just yet.
Not only do you have the new credit building loans to make payments on. You also have all that available credit on the cards you just paid off–a temptation that often proves too much for many. There are only two options for handling this responsibly.
The first option is to return your credit cards to a zero balance every month. If you can’t do that, then the second option is to cancel them.
Yes, canceling your credit cards will affect your credit utilization ratio. But that’s far preferable to maxing out your credit cards again, which would pretty much negate the benefit of the personal loan that previously wiped the debt clean.
The thing is, you didn’t take out a personal loan to pay off credit cards just so you can max them out again. You took out the personal loan to help your credit, not hurt it by racking up more debt.
6. Follow other good credit practices
Here’s a list of the most important practices to follow when it comes to credit building loans.
- Pay all of your bills on time, every time
- Pay down unpaid debt as aggressively as possible
- Don’t use more than 30 percent of your available credit
- Check your credit reports every 12 months through AnnualCreditReport
- If you find errors on your credit reports, dispute them with the credit bureaus
- Before paying off a debt through a collection agency, ask them to verify the debt first
- If a collection agency verifies a debt, negotiate the payoff amount and the removal of the negative listing from your credit reports
In other words, there are numerous things you can do to build your credit. So weigh the pros and cons of small loans to build credit very carefully.
If you use credit building loans incorrectly, they can hurt your score and drag you deeper into debt. But if you use them responsibly, credit building loans can boost your score and save you money in the long-run.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 6.98%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|