Table of Contents:
What is a credit builder loan?
How do credit builder loans work?
Credit Builder Loans
Establishing good credit is not as simple as taking a walk in the park. Many lenders require a good credit history to allow you to open an account. It could be difficult for credit newbies to get basic forms of credit. However, there is a silver lining on the issue.
A credit builder loan could be a good option because it doesn’t need a credit history. It could be a good fit if you don’t qualify for a credit card or if you don’t have a friend or family who will allow you to be an authorized user on their account. Everyone begins life without credit. You could need an apartment lease, a car loan, or a mortgage. Presenting your landlord or bank with a good credit history shows that you've been financially responsible in your past. What is a credit builder loan? How does it work? What are its benefits? Let us get into the nitty-gritty of credit builder loans.
What is a credit builder loan?
A credit builder loan is different from the traditional loan, such as Payday Loans that most people are used to. In traditional loans, upon approval of your loan, the lender sends money to your account. Afterward, you are given a grace period, and then you begin making monthly payments until your loan is fully paid off. On the other hand, a credit builder loan is like a reverse loan. Upon approval of your credit builder loan, you make monthly payments similar to a traditional loan. The lender diverts your payments to a third-party bank, which holds the funds for you. When you finish paying the loan, the third-party bank releases the funds through your lender.
It simply means that a credit builder loan is like a savings account. You will be required to make payments into the account over the course of a year or even more. At the end of the duration, you get to receive all the money you paid to the lender. Furthermore, your credit report will show that you have been making timely payments for a year! Credit builder loans are a simple way of developing a positive credit history. You only need a one-time fee for opening your account and 12 timely payments each month to build your credit score.
How do credit builder loans work?
As mentioned earlier, credit builder loans are not typical loans. You will not receive the money upfront. Your lender deposits your monthly payments into a saving account that the loanee can't access until the loan is fully paid. The loan amounts usually range between $300 loan and $1000 loan.
Unlike traditional loans, you get money after paying your credit builder loan instead of receiving money and then repaying it. It is a great opportunity to help you establish a good credit score. Your ability to make timely payments are reported to three credit bureaus: TransUnion, Equifax, and Experian.
Find out how traditional Payday Loans work. Or compare the best Payday Loan direct lenders to get an instant cash advance online:
Credit builder loans for bad credit
All credit building lenders report your payments to the three major credit bureaus in the country, Transunion, Equifax, and Experian. It means that every moment you make a timely payment helps build a good credit score. Notably, payment history accounts for more than a third or 35% of the credit score calculation. If you don't have a credit history, credit builder loans are a great way to show the lender that you have experience with credit.
You could be thinking about your bad credit. Credit builder loans will help you a new positive history that could help overcome some of the negative histories you had, like missed payments. With every payment you make on your credit builder loan, the impact of bad credit fades with time. Your new positive repayment plan will outweigh your previous mistakes.
A credit builder loan can aid in improving the types and number of accounts you have. Although they are minor factors used when calculating your credit score, they could give you a boost. When you have a mix of credit cards and loans, it shows that you can manage various accounts simultaneously.
Credit builder loans near me
Lending circles
It is a method used among friends or families where a credit-building plan is provided by a Lending Circles Program, which is managed by the Mission Asset Fund. You will get interest-free social loans whose payments are reported to the three major credit bureaus. Notably, the services aren't available everywhere. However, you can fill in your zip code and find out if there is one in your local community. Such groups usually contain ten participants who agree to put in a particular amount of money each month, and the total amount collected goes to one person. Similar to a round-robin fashion, the members contribute each month until all participants receive their money.
Community banks or credit unions
Identifying and finding a credit-builder loan could be challenging. One of the simplest ways to search online for a "credit builder loan" plus your state. Credit unions usually have membership requirements, such as making charitable donations, worshipping in a particular church, working in a certain company, or living in a particular county. You could get a credit-builder loan in your nearby credit union or community bank. They have some of the lowest interest rates.
Online lenders
There are many online credit-builder accounts. They provide a similar payment plant to credit unions or community banks. You will make monthly payments towards your savings account. One of the online lenders is Self.
Community Development Finance Institutions (CDFIs)
If you are unable to get a credit-builder loan from a community bank or credit union, you could try a CDFI, which is an organization developed to help lower-income earning communities. There are approximately 1000 CDFIs in the US. There are CDFIs in every state. You can search for the CDFI in your state.
Advantages of credit builder loans
- You get credit build loans with no credit check. The companies will base your worthiness on other issues not necessarily associated with your credit history.
- Qualifying for a credit-builder loan is faster and easier than getting a personal loan, an auto loan, or a new credit card.
- With each timely payment you make on your loan, you build a positive repayment history, which will be used to improve your credit score.
- Credit-builder loans help you achieve what they say. Their primary goal is helping you build a positive credit history even if you have a nonexistent or bad credit history.
- Your credit-builder loans are reported to the three main credit bureaus, Transunion, Equifax, and Experian. The loan is reported as a debt owed, and it begins your positive credit history.
The Bottom Line
Credit-builder loans are a great option for you to build your nonexistent or bad credit score. It shows lenders that you can pay your loans efficiently and responsibly. It could open up greater opportunities for you in the future. However, before getting your credit-builder loan, get to learn the specifics. How much will I pay monthly? What are the interest rates? Do I need collateral? Is there any flexibility? Also, it would be best if you learned whether they report the loan repayments to the three credit bureaus. Credit-builder loans could improve your credit score while improving your savings momentum. All in all, it could assist you in reaching the next financial level.
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