A credit-builder loan is an installment loan with fixed monthly payments for someone who wants to rebuild or establish their credit. When you take out a credit-builder loan, the lender puts money into a savings account for you, and you then repay that amount plus interest before receiving the savings account at the end.
During the life of the loan, the lender will report your payment history to the credit bureaus. If you pay on time, the information will help your credit. If you don't pay on time, though, you risk damaging your credit score.
What a Credit-Builder Loan Will & Will Not Do
What It Will Do
What It Won't Do
Help you build or establish credit
Let you borrow money
Let you use the money in the savings account while the account is open
Help you get a loan or credit card in the future
Give you back all the money you spend on payments
Most credit-builder loans run from $300 to $1,000, offer loan terms of 6 to 24 months and have an APR range of about 6% to 16%. You still need to pay interest, like with other loans, and you may need to pay a small fee to open the account.
Some lenders may put your money into an interest-bearing account, which can make up for the cost of your APR slightly. Alternatively, lenders might give a partial interest refund. Although you won't get all of your money back, the improvement of your credit is worth it.
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