Financial institutions like community banks, credit unions and some online apps or platforms issue credit builder loans. Accounts meant for this type of credit require an initial deposit, which the person will make payments for. Interest rates usually vary between 9 and 16% but can fall out of that specific range.
Once you complete making payments, you will get the original deposit back. Some financial services will even give back part of the interest to reward you for on-time payments. Though the money belongs to the borrower, it will be reported to credit bureaus like any regular loan
Are you interested in knowing how a credit builder loan can boost your credit score after losing your job or household income? Here is a detailed guide compiled by the Coast Tradelines’ finance team that will help you understand why they have become an effective option for building or restoring credit fast. Visit coasttradelines.com for more.
A credit builder loan can boost your credit score quicker than a secured credit card.
Those who wish to boost their credit eligibility faster have opted for credit builder loans to enhance their scores. When time is of great importance, and you want to recover, you can quickly build a positive repayment history using a credit builder loan compared to using secured credit cards.
You do not require a high credit score or a long-term payment history.
Damaged-credit borrowers or first-time applicants applying for a personal loan or traditional credit card can be rejected if they cannot show a history of making on-time payments. Credit builder loans do not need an already established payment history or an improved credit score.
Credit builder loans serve a dual purpose because they are meant for persons with low credit scores or those who don’t have any initial borrowing history. It acts as a personal loan that requires a monthly payment to improve your score with credit reporting companies like FICO and as a general savings account. Every time you make on-time payment, the earnings are kept in an account in the institution offering the loan. Once you have cleared the loan balance, you will get back the complete payments you made without the interest.
You will have affordable options
The first thing is establishing the amount of income you can commit towards a credit builder loan. Regular loan amount usually ranges between $500 to $1000. This comes with a repayment plan of up to 24 months. A perfect example is a $500 loan that comes with a 12-month term. It would require a monthly payment of approximately $44, made up of interest and principal.
You can also settle for your credit builder loan amount, depending on the amount you can pay every month. The payment plan is dependent on the period you wish to push on, boosting your credit score and future plans. You can get more affordable options.
Your on-time credit builder loan repayments are communicated to major credit bureaus
Know credit reporting bureaus like VantageScore note each monthly payment made to clear the balance on a credit builder loan. The payment information becomes the score approval most lenders will use to determine your eligibility.
Your funds won’t be available until the loan is fully paid
A good plan can keep you on the right track to restore your credit if your current budget can cover the payments needed during the life of the loan. Most plans are set up in a way that you will not be able to access your funds until the loan is paid fully. You need to make large payments to clear it entirely if you need funds immediately.
It requires patience to build a high credit score
It may take time to build the kind of credit score you need. You may take time to get approvals for a bank loan or qualify to rent an apartment when you start your first payments on a credit builder loan. A little time and patience is needed if you want to see your credit score go from good to excellent.
Get a New Start
A highly experienced financial team can work with you to determine the best options to improve your credit. Your credit history does not matter in this case. Look for the right platforms to rebuild your credit score.
When to Apply for a Credit Builder Loan
A credit builder loan can help or harm your credit. But how do you determine if it is the best for you?
You should consider this type of loan if you:
- Don’t have any outstanding debt
- Can afford to make the necessary monthly payments
- Don’t have any credit history at the moment
- Have no debts reported to any of the credit bureaus
- Fully committed to make timely payments of the loan
If you already have an outstanding debt reported to the credit bureaus, a tight budget, and also late on some payments, you may still want to pass.
Borrowers who have existing loan responsibilities are likely to struggle to combine this type of loan on their repayment obligations. A perfect example is when trying to make a late payment for their non-credit builder loan. It is estimated that 4 out of 10 people who applied for a credit builder loan missed payments. This affected their credit more that it could have helped them.
The surprising fact is that about 45% of those who don’t have any other type of debt usually end up missing at least one payment of on their credit building loan. This is a survey carried out by several experts.
Another indicator is if one has a history of bouncing checks. You may easily fail to go past the initial stages meant to confirm your eligibility for this type of loan. Before applying for a credit builder loan, you should work on your credit score and improve it. You should also take your time to determine if it is really the best move for you.
In the long run, making timely payments for your current obligations should be your priority.