Credit Builder Loans
Credit builder loans are designed for borrowers with low/no credit scores. These loans work a bit different than traditional loans. They allow to take out a small amount of debt and demonstrate that you are a reliable borrower. Making regular on-time payments towards a credit builder loan may help you establish a history of positive credit behavior.
When you are approved for a traditional loan, you receive the money up front and repay the lender with interest over a certain period of time. With a credit builder loan, the lender deposits money into a certificate of deposit or savings account. This money is held as collateral and you will not receive it until the loan has been repaid.
You'll be responsible for making a series of fixed monthly payments along with interest, to the lender for the duration of your loan term in which was agreed upon. Some lenders will also reimburse you for a portion of the interest you paid.
Typically, credit builder loans are offered in small amounts (around $300 and $1,000) by small lenders, such as credit unions, community banks and online lenders. People with low or no credit scores are categorized as risky borrowers. Credit builder loans allow lenders to offset that risk by holding money in an account as collateral, while still offering consumers an opportunity to build a strong financial profile.
Just like traditional loans, lenders report your payment activity to the three reporting agencies - Equifax, TransUnion, Experian. The foundation of a favorable credit history is a good payment history. This is where on time payments for your credit builder loan make a difference on your credit report in order to improve it; however this also means that missing a payment or payments jeopardizes your hard work as well. Late payments can remain on your credit report for up to 7 years and normally appear on your credit report after 30 days. Therefore if you can avoid pitfalls of irresponsible financial behavior, these loans can be a great strategy for building/rebuilding your credit history and paving the way for you to access credit to pay for important expenses in the future.
Pros & Cons
Pros
Pros
Pros
- Credit builder loans are easier to qualify for than a traditional loan.
- If you make regular on time monthly payments, credit builder loans are good opportunity to improve your credit scores.
- Higher credit scores mean you'll have better chance of being approved to take on important future debt, such as mortgages and auto loans.
- Yo are able to use the money from the loans to help boost your savings.
Cons
Pros
Pros
- Missed payments can decrease your credit scores and quickly set you back financially.
- The amount provided by the loan can only be accessed after you repay it so it's not a good choice for anyone who needs money immediately.
- Credit builder loans are only available in small amounts.
- Fees and interest rates can add up, especially if you are already in a budget.
- It's important to know the terms of the loan you apply for due to interest rates and other details vary widely between lenders.