When you’re just starting out and have little or no credit history, it can be difficult to build up credit. Many recommend starting with a credit card with a low limit, applying for a personal loan, or becoming an authorized user on someone’s credit card. However, did you know there is another option available? You may actually want to consider a credit builder loan. Here’s what you need to know about credit builder loans, how you can make the most of them, and how you can apply for one.
What is a Credit Builder Loan?
A credit builder loan is an installment loan and when approved, you don’t get the money right away. Instead, the money is put into a savings account. Over the term period, usually a few months, you will send in fixed payments to the lender. Once you hit the credit builder loan amount you were granted, that money you deposited is returned to you. In some cases, the lender will also return any interest you paid on the loan.
The best way to think about it is as a personal saving account you can’t touch or access until you’ve saved up to a certain amount.
How Do You Make the Most of Credit Builder Loans?
Credit builder loans usually come in ranges of $300 to $1,000 and can last anywhere from six to twenty-four months. When you make on-time payments, your lender will report your payments to the three credit bureaus, Equifax, Experian, and TransUnion, so you can grow your credit. The amount of the loan doesn’t matter as much as making sure your payments are on time.
If you’re on a smaller budget, you may want to opt for a smaller credit builder loan. This will help ensure you stay within budget while also paying on time and building your credit.
How Do You Find and Apply For Credit Builder Loans?
Many banks, credit unions, and online lenders will offer credit builder loans. You may want to talk to your current bank or credit union first about applying and see their offers. Interest rates, amounts, terms, and length of the loan will vary from lender to lender, so compare any offers you get and make sure it works for your goals.
You will likely need a few things to get approved for one of these loans. They won’t always ask to look at your credit score, but the lender will ask for documents regarding your banking history, employment history, income, current expenses, current loans, bank balances, and references. If you have a history of bouncing checks or fraud, it may hurt your chances of getting approved.
Is a Credit Builder Loan For You?
If you’re looking to build your credit, a credit builder loan could be exactly what you need. Not only will you be building up your credit during its term, but you will also be building up your savings and will be in for a nice chunk of cash when you finish paying off the loan.