What is a Credit-Builder Loan?
A credit-builder loan is a small loan with the intention of helping consumers establish or raise their credit profile.
Many people have trouble obtaining credit cards, auto financing, apartment leasing or home mortgages because they have poor (600>) credit or no credit history at all. Credit-builder loans offer a variety of financial benefits. For example, an unsecured (meaning no collateral is needed) credit builder loan offers cash up front that can be used for an emergency expense, such as a car repair, or even to fund a family vacation!
Fundamentals of credit-builder loans
Credit-builder loans usually are offered in small amounts, typically ranging from $50 to $2,500, to those in need of quick money while also raising their credit score.
Most lenders offer two types of credit building loans:
• A secured loan. A secured loan, is a loan in which the borrower pledges some asset (e.g. a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.
• An unsecured loan. An unsecured loan is one that is based on the borrower’s credit rather than the use of property as collateral for the loan, and it is also called a signature loan or a personal loan.
How a credit -builder loan affects your credit
What happens to your credit after you get a credit builder loan and start making payments? If you’re starting out with no credit history at all, you will create one with the loan and can get a credit report once the loan account is reported to the credit bureaus, according to Experian, one of the three major bureaus.
Before taking out a credit-builder loan
Learn the specifics. Will you need to put up collateral? What are the monthly payment amounts? How long will you be making payments? Is there any flexibility?
Make sure your lender is reporting to the three major credit bureaus, which they should be. After all, improving credit is the whole point.
Take time to find the best option for you. Credit builder loans can be a great way to show lenders that you can borrow and repay responsibly. Better credit opens more doors of opportunity in your financial world.