A credit builder loan can help you build up your credit if you have no credit, bad credit, or don’t want to get a credit card. It can be a great way to improve your credit, but there are pros and cons to this approach that you need to know about before signing on the dotted line.
Pro: It’s Easy to Qualify
It’s extremely easy to qualify for a credit builder loan due to how they work and the low amounts granted. Many lenders won’t even ask to see your credit score (since many applicants are using this type of loan because they have no credit). You will likely have to give information about your bank account, income, current debt, and other finances, but many are approved.
Con: Failure to Pay Could Hurt your Credit Score
Just like failing to pay a credit card bill, utility bill, or rent on time, failing to pay your credit builder loan on time can hurt your credit score. You’re getting this loan to build up your credit, showing other lenders you can afford a certain amount and are reliable with your payments. Your activity will be reported to the three major credit bureaus.
If you’re on a budget but need a credit builder loan, you don’t necessarily have to take out that much. Some of these loans can be approved for as little as $300 (they usually go up to a max of $1,000). If you ever find you’re unable to pay the loan amount on time, make sure to reach out to the lender before it’s late. They may be willing to work with you.
Pro: They Help you Save Money
Credit builder loans don’t work like other loans. Instead of giving you the money right away, the loan amount is put into a savings account for you. Over the term, you pay a certain amount towards this loan. When the amount is fully paid off, you receive the money. While it builds up your credit, you’re also saving cash! You can then put this money towards a larger purchase or continue saving it for a rainy day.
Con: There Can Be Fees
Although credit builder loans can double as savings accounts, that doesn’t mean it won’t cost you money. Some of these loans come with fees and interest. There are upfront fees, application fees, processing fees, administrative APY, and APR. You may also be charged with a penalty if you decide to pay off the loan early.
Fees and interest rates will vary quite a bit from lender to lender. Therefore, you’ll want to consider your options before deciding on any loan.
The Pros and Cons of a Credit Builder Loan
Is a credit builder loan right for you after you’ve considered these pros and cons? How bad the â€œconsâ€ are really depends on the lender and loan you’re opting for. Make sure to review your finances carefully before making any decision!