Credit Builder Loans to Consider


Improving your credit score is tricky if you are starting from scratch or from a bad score. This is a quick guide on Credit Builder Loans and how they help you reach your financial goals. Your credit score determines your financial life, and as it continually evaluates your credit history and you are able to work towards improving it.  Several ways of doing this are available.

What is a Credit Builder Loan?

These loans are especially designed to help clients with little or no credit history, or even a poor credit score, build up their score. Where other financial products require you to have an already healthy credit score, a credit-builder loan does not require it.

Despite their name, once you are approved for a secured credit-builder loan, you will not be able to withdraw it. Instead, the money is held in a savings bank account until you have finished repaying it. You are able to access all this money plus any accrued interest – if applicable.

What Are the Pros and Cons of Credit Builder Loans?

Although credit-builder loans are a great too to improve your credit score, no financial product is without its risks, so here is a sum up to help you make an informed decision:

Pros:

  • Accessibility: As previously mentioned, having a long-term or strong credit history is not required to access these loans.

  • Quick results: A credit-builder loan improves your credit score faster than a credit card.

  • Affordability: In most cases, a credit builder loan is between $300 and $1,000, and needs to get repaid in up to 24 months. Repaying $1,000 in 24 months would require a monthly payment of only $42.

  • Different approach: You are building towards your future, improving your score as you save. A credit-builder loan helps you develop financial discipline.

Cons:

  • Cost: As with any loan, you have to pay interest on it. However, not only the interest rate is usually very low, as this is run like a savings account, you accrue some positive interest offsetting its cost.

  • Worse score: If you do not keep up with your repayments, this affects your credit score, so it is critical you are certain that you are able to afford a credit-builder loan before taking it out.

  • Locked funds: Until you pay off the whole loan, you can not withdraw any monies from your secured credit-builder loan.

Types of Credit Builder Loans:

Each provider has different credit-builder loans, from the borrowed amount to the repayment term and the interest, but mainly two types exist:

  • Secured:

A secured loan is the most common credit-builder loan as it minimizes the risk to the lender. It requires some form of collateral – or security, hence the name – such as the borrowed amount being held in the bank.

  • Unsecured:

This type of loan does not require any collateral and it enables you to access a lump sum up front. You must pay the loan back on a monthly basis at a predetermined rate, but this interest rate generally is higher than a secured loan. 

What Financial Institutions Offer Credit Builder Loans?

It is unlikely a large financial institution will offer a credit-builder loan. Instead, try these options:

With a very user-friendly website, Self is a great starting point to start building up your credit score. offering secured credit-builder loans starting from as little as $25 per month. hold your loan in a savings account and at the end of the repayment term unlock it for you minus interests and fees – there is a one off $9 admin fee.

  • Loan Amount: $520 - $1,663
  • Payment Term: 12 to 24 months

As a full-service not-for-profit financial institution, they offer a comprehensive credit-builder loan, which you are able to apply for without impacting your credit score.

  • Loan Amount: $500 - $2,000
  • Payment Term: 12 to 24 months

Ready to think outside of the box? Their debt and credit card consolidation loans are an accessible way to build your credit score. Upstart offers fixed rates, about 16% cheaper than traditional models.

  • Loan Amount: $1,000 - $50,000
  • Payment Term: 3 – 5 years

As Capital One states: no one should be locked out of the financial system. With this in mind, Capital Oneoffers credit building credit cards. Their no-fee secured credit card reports to the three major credit bureaus, allowing you to build your credit. Although  Capital One requires a security deposit, this is refundable.

A bit different from your usual credit-builder loan, Chime offers the Chime Credit Builder Visa Credit Card, with no fees and no interest. This secured credit card allows you to spend whatever money you put in, either manually or by standing order. Its benefit is having access to your money while still building your credit score, however it is crucial to ensure you pay your monthly balance.

Credit-builder loans help improve your credit score, but as t multiple options are available, do not become afraid to shop around and choose the right one for you.