It is very common to be unsure of the first steps you should take to start building or rebuilding your credit. Credit Builder Loans offer an accessible and affordable way to build credit.
Even though they are specifically designed to help people establish and improve credit, credit builder loans will also help you build savings.
Here’s everything you need to know about how credit builder loans work, how much they cost, how and where to get one.
In this post:
- What Is a Credit Builder Loan?
- How Does a Credit Builder Loan Work?
- Is a Credit Builder Loan Right for Me?
- Credit Builder Loans Pros & Cons
- Will a Credit Builder Loan Improve My Credit Score?
- How Much Does a Credit Builder Loan Cost?
- Where to Get a Credit Builder Loan?
- How to Get a Credit Builder Loan?
- Things to Watch Out for
What Is a Credit Builder Loan?
A credit builder loan is a small loan that the bank puts in a savings account or CD for you.
In most cases, you won’t have access to your funds until you pay off the loan in full, but there are some providers that give you access to some of your loan funds immediately.
Upon making your final payment, you will have access to the entire loan amount, less any fees and interest charged.
The payments are reported to the three major credit bureaus which will help your payment history and should help build your credit.
This is one of the easiest to access credit building options available since there are no credit checks and pretty much anybody can get approved for a loan.
How Does a Credit Builder Loan Work?
Well, I know my English teacher used to say, ‘never answer a question with a question,’ but… Have you ever put something in ‘Layaway’ at a store?
I think the easiest way to understand how a credit builder loan works, is to think about the loan like a ‘Layaway’ option.
👉 How a Layaway Works
- Shop now, pick out what you want, and then go to the ‘Layaway’ counter in the back of the store.
- You pay a small down payment and they put the products in the back for safekeeping.
- You make regular payments for your ‘Layaway’ items.
- When you make the final payment, you get to take them home.
Credit builder loans work pretty much the same way as ‘Layaway’! The lender gives you a loan but you don’t get access to the money until you make all of the payments.
👉 How a Credit Builder Loan Works
- You choose the amount of the loan you want and the payment terms you can afford.
- You make a small down payment, usually equivalent to one monthly payment, and they put the loan away for safekeeping (I’m talking figuratively here).
- You make regular small monthly payments to the lender who then reports those payments to the three big credit agencies.
- When you make the final payment, you get access to your entire loan amount, less any fees and interest the lender charged you.
Just like ‘Layaway’!
Unlike layaway, credit builder loans are a great tool to build your credit and improve your payment history, if you make all your payments on time. And, instead of taking home a bunch of stuff that you probably didn’t need in the first place, you will receive your loan amount in one lump sum.
Is a Credit Builder Loan Right for Me?
A credit builder loan is a great credit-building option for people just starting on their credit journey as well as for people who drove their credit off a cliff and are now trying to climb back up.
When you apply for a credit builder loan, there is no credit check. Applying for a loan will have minimal effects on your credit score.
As long as you make your payments on time, you will build a positive payment history, which accounts for 35% of your credit score.
You will also add an installment loan to your credit mix.
However, due to the nature of these loans, they will cost you. At the end of the terms, the total amount of money you have paid to the lender will be more than the amount of the loan you receive upon completing your payment terms.
Most credit builder loans will not allow you to access the funds until you have paid off the loan completely. This means that you cannot take out any amount of cash, even for emergencies, unless you cancel your account.
👍 A credit builder loan is the best option for people with limited or no credit history who are looking to build savings and improve their credit score at the same time.
👎 It’s not a great option if you are uncertain that you will be able to make payments on time or do without that money for the duration of your loan term.
Credit Builder Loans Pros & Cons
When deciding if a credit builder loan is right for you it’s important to weigh the pros and cons of this product against the possible impact on your credit score.
- No credit check
- Improves payment history
- Adds to your credit mix
- Helps you save money
- Creates good payments/savings habit
- Costs money to build credit
- No access to funds
Will a Credit Builder Loan Improve My Credit Score?
Credit builder loans are a great credit-building tool that when paid on time will have a positive effect on credit history.
Here’s the deal… If you have bad credit, no credit, or are just looking to improve credit, and you get a credit builder loan, make the payments on time, it certainly can’t hurt your score.
We know that your payment history plays a significant factor in determining your credit score, as much as 35%. So, if we can have loan payments reported for a year or two on a credit builder loan, it is going to increase your payment history.
But more importantly, is that it will add an installment loan to your credit mix. Typically people with lower credit scores do not qualify for installment loans so they are weighted a bit heavier than credit card revolving loans.
⚠️ Here’s the one thing you DON’T want to do… Never make a late payment on your credit builder loan!
That would be a real knucklehead move that could lower your credit score and ultimately defeat the purpose of you getting one.
How Much Will Your Credit Score Increase?
People with thin credit files will see the biggest score gains.
We’ve heard stories of people’s credit scores increasing over 100 points… This seems possible, especially for people with absolutely NO credit history or limited.
A CFPB study found that people who’ve taken out a credit builder loan without existing debt saw their score increase by 60 points more than those of people who already had debt.
⚠️ If your credit report is a mess, if you have a bunch of late payments or owe too much money, the impact of a credit builder loan on your credit score will be minimal.
How Much Does a Credit Builder Loan Cost?
Credit builder loans can cost anywhere between $12 and $150 per month, but remember, once you make your final payment you will get that money back less some minimal fees and interest.
As you can see, there are many factors that influence the final cost of a credit builder loan. We explained what these factors are in detail, and provided some examples, in our article on the cost of credit builder loans, so check it out if you want to learn more about them.
Here’s a shorter version of all the factors that impact the cost:
- Loan amount – the total amount of the credit builder loan that you are borrowing.
- Loan term – how many months you will have to pay off your credit builder loan.
- APR – this percentage rate represents the fees associated with the loan and the interest rate all rolled up into one uniform and easy-to-use number.
- Administrative fees – fees associated with starting the loan and administering it.
Be sure to assess exactly how much you will end up paying and how much you expect to improve your score, and decide whether it’s worth it.
Credit Builder Loan Cost Examples
To give you an example of costs associated with a credit builder loan, take a look at these two examples.
The first table is the pricing of Self, one of the most popular credit builder loans today. Compared to similar products, Self’s costs are somewhere in the mid-range.
|Small Builder||Medium Builder||Large Builder||X-Large Builder|
|Term||24 months||24 months||12 months||12 months|
Next, take a look at the cost of Credit Strong, which offers many more options, most with larger loan amounts and longer loan terms.
|SUBSCRIBE 1000||SUBSCRIBE 2500||BUILD AND SAVE 1000||BUILD AND SAVE 1100||BUILD AND SAVE 2000||MAGNUM® 5000||MAGNUM® 10000|
|Max Term||10 years||10 years||24 months||36 months||24 months||10 years||10 years|
👉 If you want to see what other popular credit builder loans cost, take a look at our list of the best credit builder loans where we break down the pricing of each provider and compare them head to head.
Where to Get a Credit Builder Loan?
Credit builder loans have traditionally been offered by credit unions and banks. Today, there’s a growing number of online lenders that make the process of getting a loan faster and more convenient.
1. Credit Unions
Did you know that your local credit union may offer a credit builder loan? Approximately 15% of Credit Unions provide them.
If you belong to a Credit Union that offers credit builder loans then you are in luck! They usually offer them with little to no startup costs, low APR rates, and friendly terms.
The problem is that you have to be a member of the Credit Union to qualify for their credit builder loan. Some Credit Unions allow membership based on where you live, where you work, military status, or associations you belong to.
Be sure to check with your local Credit Union to see if you qualify.
2. Local Banks
Occasionally, you will come across a local bank that offers a credit builder loan. Just like the Credit Unions, they offer excellent terms that are hard to beat.
Unfortunately, they don’t usually advertise these loans, and you have to get lucky for your local bank to offer them.
One positive thing about the local banks offering CBLs is that you won’t have to qualify to be a member of the bank, unlike the Credit Unions.
In many bigger cities, you will find CDFI’s (Community Development Financial Institution) that exist to help increase the financial fluency and power of lower-income neighborhoods.
These CDFI’s will offer CBLs to people located in their community at very low rates and excellent payment terms.
Check with your local Community Development Financial Institution to see if they have such a program.
4. Lending Circles
You often find lending circles working within local communities with the goal of credit building and credit education.
The way they work is that a group of people each pay a set amount each month into a financial institutionally regulated account. One of the people in your ‘Lending Circle’ each month is pre-selected to receive that entire month’s payment from all of the members. Each member takes their fair turn, and the financial institution organizing the circle reports your payments to the three major credit bureaus.
Some of these programs will cost you almost nothing and not charge you an interest rate.
Check with local financial institutions about a lending circle in your area.
5. Online National Lenders
The majority of people can quickly and easily obtain a credit builder loan online from the comfort of their couch. You can sign up for a loan in literally a couple of minutes online, and their costs are very competitive.
Here are our top choices for nationally available lenders offering credit builder loans online:
- Self – Best for building credit and savings in one plan
- Credit Strong – Best for large loan amount
- MoneyLion – Best for easy access to funds
- SeedFi – Best for payment flexibility and costs
- Digital Federal Credit Union – Credit union membership, low rates, no fees
You can find more details on each of these credit builder loans here.
You may be able to save a few dollars finding a Credit Union or Lending Circle in your area, but it may take you days, or even months to find those savings.
How To Get A Credit Builder Loan?
If you decided on getting a credit builder loan but are not sure where to start or what awaits you, here’s what you have to do, from start to finish.
1. Find a Credit Builder Loan Lender
Whether you look into a Credit Union, Local Bank, CDFI, or Self Lender, identifying your lender options is your first step.
2. Decide How Much to Borrow
You don’t need to borrow a significant amount. Keep in mind the more you borrow the more you will pay in interest.
You are trying to establish a payment history, but it is also sort of like a forced savings account so if you have a big purchase in mind that you need to save up for…why not kill two birds with one stone?
3. Compare Lender Costs
You need to identify the possible lenders and then look at their costs and terms.
Put their costs and terms side by side… How much are their APR, costs for the loan, payment terms, and are there any penalties?
4. Apply For The Loan
Once you determine which credit builder loan is best for you, go ahead and apply with confidence.
5. Make All Payments On Time
If accepted, remember the whole point of getting a credit builder loan is to establish a good payment history with the big three credit bureaus.
So, DO NOT make any late payments!
Let me say that one more time, NO LATE PAYMENTS!
6. Monitor Your Credit Score
Now that you are actively pursuing a better credit score, it is time for you to start monitoring it.
7. Don’t Rush Repayment
Again, unlike any other loan program, this is the one you want to make every payment on time, but you don’t want to pay off the loan early.
Remember, you signed up for a credit builder loan to help your payment history look better on your credit score. Paying the loan off early will completely defeat this purpose.
8. Make All Payments
Once you make that final loan payment, you will have access to the entire sum that you paid the lender, less any interest and fees charged.
Things to Watch Out for When Shopping for a Credit Builder Loan
Actual Loan Costs
There can be many fees associated with any loan and these loans are no different. You need to know how much the loan is costing you to make an informed decision on the best option for you.
Keep a close eye on the fees to start the loan, APR rates, and the monthly payment terms.
Knowing these key terms will help you make a solid final decision.
Fresh Start Loans
We have seen unsecured personal loans advertised under as Credit Builder Loans.
Fresh Start Loan is a name that is used very loosely and generally is not credit builder loans.
If the advertisement says that you will get money upfront, it is probably not a loan you will qualify for if you have no credit or bad credit.
Make sure you thoroughly investigate any Fresh Start Loan you are considering.
Starting Over Loans
I have seen this term only a couple of times while researching credit builder loans.
Starting Over Loans are targeted at people with bad credit and have insanely high-interest rates.
Similar to Fresh Start Loans, the term ‘Starting Over Loans’ has no specific industry meaning and can be used for a wide range of personal type loans.
Again, just like Fresh Start Loans, make sure that you do your research before purchasing.
Sometimes people confuse Pledge Loans with credit builder loans. On the face, they can look similar, but in reality and function, they are not.
A Pledge Loan is a secured personal loan.
A borrower will pledge a CD (Certificate of Deposit) as collateral, and in return, a Credit Union (I have only ever seen Credit Unions use the term Pledge Loan) will give a loan up to the amount in the CD pledged.
This is much different than a credit builder loan because in order to get a credit builder loan you do not have to put up any collateral.
These are still an excellent way to build credit, but you have to have collateral to pledge, unlike credit builder loans where you make a small upfront payment and regular small monthly payments.