Credit-Builder Loans

Adam McCann, Financial WriterJun 15, 2021

Adam McCann, Financial Writer
Jun 15, 2021

A credit-builder loan is a unique type of loan that is specifically intended to help increase the user’s credit score. With a credit-builder loan, the “borrower” actually pays the lender in monthly installments and then receives the money in a savings account at the end. During the process, the lender reports the monthly payments to the credit bureaus, which builds the borrower’s credit history.

So, you can think of a credit-builder loan as a series of savings-account deposits that help improve your credit standing. The difference is you will owe the lender interest, and you may need to pay a fee to open an account. Unlike most personal loans, credit-builder loans are open to people who have no credit or even bad credit. This is because the lender doesn’t have much risk since they hold the savings account until you finish paying.

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Table of Contents

Best Places Get a Credit-Builder Loan How Does a Credit-Builder Loan Work?Credit-Builder Loan Alternatives Bottom Line Credit-Builder Loan FAQ

Best Places Get a Credit-Builder Loan

There are three main places to look for a credit-builder loan: local community banks, credit unions and online lenders. We’ll highlight the best option from each type of lender below.

Best Bank to Get a Credit-Builder Loan: Sunrise Banks

The best bank for a credit-builder loan is Sunrise Banks because it places the loan funds into an interest-bearing CD. This helps to reduce the cost of the loan because you’re earning money on the account at the same time. In addition, even though Sunrise Banks is a bank that’s local to Minnesota, people anywhere in the U.S. can apply online for a credit-builder loan.

Sunrise Banks also offers both 12-month and 18-month credit-builder loans. In each case, the monthly payment amounts to approximately $50, with an average APR of around 21% for the 12-month loan and 15% for the 18-month loan. The amount of interest you will earn on the CD can vary from person to person, and you’ll need to speak individually with a representative to find out more.

Best Credit Union to Get a Credit-Builder Loan: Alltru Credit Union

The best credit union to get a credit-builder loan from is Alltru Credit Union because you can get a refund for 50% of all of the interest you pay over the life of the loan. Plus, the APR is 12% to begin with, which is decently low. Alltru offers 12-month credit-builder loans of $300 to $1,000.

To get a credit-builder loan from Alltru Credit Union (formerly 1st Financial Credit Union), you will need to become a member. Membership is open to people who live in the City of St. Louis, St. Louis County, or St. Charles County. Relatives of existing members can also join.

Best Online Lender to Get a Credit-Builder Loan: Self

The best online lender to get a credit-builder loan from is Self (formerly Self Lender) because it offers loans with payments as small as $25 per month for 12 to 24 months. Self credit-builder loans are also available to people in all 50 states. The loans typically have an APR of around 15% with an administration fee of around $9.

No matter where you decide to get your credit-builder loan from, the lender ideally should report payments to all the major credit bureaus: Experian, Equifax and TransUnion. Sunrise Banks, Alltru Credit Union and Self report to all three major bureaus.

How Does a Credit-Builder Loan Work?

A credit-builder loan works the opposite way of a regular personal loan, but the start of the process is similar to how you’d go about getting a personal loan. First, you’ll need to compare lenders. When deciding which lender is best for you, it’s important to look at the loan amounts they offer, their APR range, their fees and whether the savings account is interest-bearing.

Next, you’ll submit an application. This process is very similar to applying for a normal personal loan. The application will include such things as your address, income, employment status and housing status. You may also need to provide proof of income, employment, existing bank accounts and more.

Before opening your credit-builder loan account, you may have to pay a small, one-time administration fee. Some lenders may also charge a fee for late payments.

A credit-builder loan really starts working differently from a personal loan after the borrower’s application is approved.

The lender opens a savings account: After the lender approves your application, they set aside the amount of the loan in a savings account for you. But you will not have access to this account until you pay off the full loan amount plus interest.
You make payments: You will make equal monthly installment payments to the lender over six to 24 months, depending on the size of the loan and the lender’s policies. Most credit-builder loans run from $300 to $1,000, according to Experian.
The lender reports your payments to the credit bureaus: The lender will report your payment status, whether on-time or late, to the credit bureaus each month. If you are responsible and pay on time, your score should increase. If not, your score will decrease, defeating the purpose of the loan.
The lender charges interest: APRs tend to range between 6% and 16%. However, the cost of this APR may be slightly reduced by interest you earn on the savings account, if the lender puts your money in an interest-bearing account. In addition, the lender may return some of the interest you pay on the loan at the end.
You receive the funds: Once you have finished making all your payments on the loan, the lender will give you access to the savings account or wire the money to an account of your choosing. You will be free to use the funds for whatever you wish.

If you take out a credit-builder loan, it’s best to pay only what’s required of you every month. The whole point of a credit-builder loan is to have monthly payments reported to the credit bureaus. Paying it off early would mean fewer months of positive payment history.

You should also try your best to avoid late payments. Having a payment reported as late to the credit bureaus will hurt your credit-building efforts.

Credit-Builder Loan Alternatives

A credit-builder loan is a way for people with bad credit or no credit to improve their credit standing. However, credit-builder loans are not the only way for people in this situation to build credit. Other options include getting credit cards, being an authorized user or taking out a traditional personal loan.

Credit cards

People with bad credit or no credit have a high chance of qualifying for a secured credit card if they can put down the minimum security deposit (usually $200 - $300). But there are also unsecured cards (including student cards) that don’t require a credit history.

Credit cards are the best way to build credit because they report to the credit bureaus monthly whether or not you make any purchases. Making a small purchase and paying in full by the due date will build your score most quickly. But the most important part of building credit with a credit card is to make on-time payments.

Authorized user

If can’t get your own credit card account or don’t want to, you can become an authorized user on someone else’s account. As an authorized user, you can make purchases using the primary user’s credit line if they allow you to do so. But only the primary cardholder is responsible for paying. If the primary cardholder pays on time and the two of you keep a low credit utilization ratio, both of your credit scores will improve.

Personal loan

Some lenders will offer personal loans to people with bad credit. But they will likely charge high interest rates – as high as 36% in some cases. Federal credit unions cap their rates at 18%, however, and some may accept applicants with bad credit.

Another alternative is a secured personal loan, where you must put up collateral to take out the loan. But if you default, you could lose your collateral to the lender. Both secured and unsecured personal loans report payments on a monthly basis to the credit bureaus.

Bottom Line

Credit-builder loans can be a good option for people who have a few hundred dollars they’re willing to temporarily part with in order to build their credit. Though you won’t get all of your money back, considering that you’ll have to pay interest, the improvement in your credit is worth more. It will help you on your way to getting financial products with better terms in the future. And the better your credit score is, the easier other aspects of life may become as well, like getting an apartment or a job.

However, before you take out a credit-builder loan, be sure to consider your other options first. Depending on your situation, a credit card or a personal loan may be more helpful.

Credit-Builder Loan FAQ (1 question)

How to get a loan with no credit?

Upvotes

Adam McCann

You can get a loan with no credit, either on your own or with a co-signer. Your options to get a loan with no credit and no co-signer include credit-builder loans, secured personal loans and home equity loans. But you won't be able to qualify for regular personal loans without collateral because they usually require a 600+ credit score and a few years of credit history. That's where a co-signer comes in handy. By getting someone with established credit history to co-sign for you, you can use their credit rather than yours during the approval process.

If all else fails, you could always try to get a loan from a family member or friend, since they won't necessarily base their decision on your credit history. Lastly, if you want a small loan of $300 - $500 that's available whenever you need it, you can look into credit cards.

How to get a loan with no credit

Consider credit-builder loans
Put up collateral for a secured personal loan
Take advantage of home equity
Get a co-signer
Borrow from family/friends
Get a credit card for no credit

Credit-Builder Loans

Credit-builder loans are the first avenue to pursue if you don't need cash immediately and are just looking to establish credit history. They're fairly simple. The lender puts a sum of money into a savings account for you, and you repay that sum over time. The lender then reports those payments to the credit bureaus. And at the end, you receive access to the account, so you get the money.

The best places to look for credit-builder loans are your local credit unions and banks. If you need cash right away, you'll have to try another option.

Secured Personal Loans

A secured personal loan requires you to put up something you own as collateral to take out the loan. Some possible things you could use as collateral include your car, property, stocks, or even valuable possessions like art. If you default on the loan, the lender can take your collateral as repayment so they don't lose money.

People with no credit shouldn't have trouble getting approved for a secured personal loan, as they're generally targeted toward people who have bad credit. No credit history is more positive than a history of irresponsibility. And since there's little risk to the lender, approval rates are high. Before going into a secured personal loan, be sure that you're confident you can make your payments. You don't want to risk losing your collateral.

Other “no credit/bad credit” lenders exist. But most of the time, if they're not secured loans they're payday lenders. A payday lender gives you a loan (plus a huge fee) that you will pay back with your next paycheck. Avoid these loans at all costs – they are predatory and charge gigantic fees just to leave you still in a difficult position after you get your paycheck.

Home Equity Loans

Another way to obtain a loan with no credit is to get a home equity loan. A home equity loan is a secured loan that lets you borrow based on the market value of your house minus the amount you have left to pay on the mortgage. That could potentially give you access to a lot of money. However, the danger is that if you default, you could lose your house.

The other catch is that if you have no credit, you probably don't have a mortgage, considering credit scores and reports are a big part of the mortgage decision-making process.

Co-signing

Even if you have no credit, it's possible to get a regular unsecured personal loan if you have a co-signer with established credit history. When you apply, the lender will not base their decision on your credit, but rather on the credit of the co-signer. So if you can find a co-signer with good or excellent credit history, your chances of qualifying for a loan are high.

But it's important to know that the co-signer provides a guarantee of repayment. If you're unable to pay the loan back, the co-signer is held responsible. Make sure you are confident in your repayment abilities so you don't create a bad situation for your co-signer.

Loans From Family/Friends

One simple way to get a loan with no credit is to borrow from a family member or friend. Unlike with a bank, credit union or online lender, you can make a personal appeal. And depending on the person, you may get lenient terms for repayment and low interest.

But if you pursue this option, be sure to make a contract in writing with explicit terms. It's important for the other person to be able to hold you accountable. The biggest danger with this type of loan is that if you default, your relationship with the other person may be ruined. So you must decide if that's a risk you want to take, versus the risk of collateral from another type of lender.

Credit Cards

If you need to borrow $300 or less, you might want to apply for a credit card for no credit instead. There are several credit cards available where you don't need any credit history to get approved, so long as you have some form of income. You probably won't get a big credit line to start (usually around $300), but you can tap in to it any time you need.

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