What Is A Credit Builder Loan: Your Opportunity To Establish Solid Credit

sales person explaining to father and teenager what is a credit builder loan

What Is A Credit Builder Loan

Need to work on your credit? If you do then this post may be able to help you out. So, keep reading to find out what is a credit builder loan and how they can help you reach your credit goals.

lender handing out cash to credit builder loan borrower

Maybe you haven’t even established any credit yet?

Sometimes building credit can feel like trying to break into a new career–you’ve got to have the experience to get the gig, but you can’t get the gig without experience.

Thankfully, there are more than a few options out there for building and improving your credit.

One option is with a credit builder loan.

How a Credit Builder Loan Works

Credit builder loans come in a couple different flavors, all designed with building credit in mind.

Keep in mind that, since these loan products are for borrowers with low or no credit, the loan amounts will not be particularly large. Most will be in the $500 to $1000 range at most.

A True Credit Builder Loan

With this type of loan, the bank puts up the money by placing it in a savings account of sorts. You then make payments on the money.

Once the loan is paid off, you’ll have full access to the funds.pink piggy bank

Unsecured Loan

With this type of loan, you will receive cash up front to use as you see fit. The interest rate will likely be higher, but you’ll have an opportunity to establish credit by making timely payments

Secured Loan

This type of credit building loan is secured by the money you already have in savings at the bank. You essentially make payments until the loan pays in full to get access to the money.

It sounds odd but could be your best option for building or establishing credit.

Where Can I Get a Credit Building Loan?

Your best bet is to check with your bank or a local credit union. They’ll explain what is a credit builder loan and give you all the necessary information to find out if you qualify.

Many banks and credit unions offer credit-building loans but usually don’t advertise them widely. This is just one of those situations where you’ll have to ask.

A number of non-profits also offer credit building loan programs at the state level.

Before You Sign on the Dotted Line

Before taking any type of credit builder loan, it’s important to understand what you’re getting yourself into.man signing credit builder loan documents

Debt is often easy to get into but can be quite difficult to get out of. After all, the average American wouldn’t have nearly $10,000 in credit card debt if a debt was easy to pay off quickly.

Just make sure you know the terms and what you’ll be responsible for.

Putting It All Together

Whether you’re young and without credit or have made a few mistakes that need to be cleared up, a credit building loan may help.

There are lots of options out there with these types of loans, just remember that you’ll probably need to ask. And don’t forget to do your homework and understand what you’re getting yourself into.

If you’re working on your credit, be sure to check out some of our other credit building resources.

 

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5 Comments

  1. Did I just read the average american has $10,000 in credit card debt? Are you serious? 

    I am not sure if I am getting this right. I simply get $1,000 dollars to which I have access right away and then simply pay it off over a duration of time? 

    Is there any interest involved in that kind of loans? 

    Thanks for your help!

    • Hi Manny – Yes you read that correctly.  That’s according to the CNBC report.  I’ve heard other estimates as much as $16,000 per household.

      With a credit builder loan you have two avenues, one secured the other unsecured.

      With a secured credit builder loan the bank will give you a loan secured against funds you already have in a bank account.

      An unsecured credit builder loan, the bank will lend it to you, and you pay the balance plus interest over time.  

      The loan amounts are quite small and range anywhere from $500 – $1000, but the idea is to start building your credit by making consistent on time payments.

      Hope this helps,

      Patrick

      Creditsquared.com

  2. This is an extremely informative post for obtaining a credit builder loan. I particularly like the idea that it can give one who has made some mistakes an opportunity for building better credit. One of the best ways to make this work would be to take the money and use it to pay on a credit card debt. Credit bureaus like that and reward you for it.

  3. What an interesting post.

    I have never heard of a credit builder loan before and found your information to be very helpful.

    This looks like an excellent first step for those people who want to establish credit.  Getting started is always the most difficult thing to do when there are so few options available to consumers.

    I know many young people that are having a difficult time getting credit, so I will be certain to share this post with them.

    You are definitely offering your readers good solutions.  Keep up the good work!

    • Tanya,

      I’m pleased you found the post both interesting and helpful.

       A credit builder loan is definitely a great way to get started for those trying to establish their credit.  It’s really just a small step, as amounts range from $500 to $1,000. 

      The really cool thing about a credit builder loan is the bank or credit union sets the amount aside in a quasi savings account.  Once the loan is paid off you get full access to the money.

      As I noted above these are not huge dollar amounts, however it is an easy way to get your credit out of the starting gates.

      One thing to keep in mind.  Make sure you understand the terms of the loan before you sign anything. You don’t want to commit to something that you don’t think you can handle.

      All the best and thanks for offering to share the post.

      Patrick

      Creditsquared.com

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