Credit Builder Loans- What They Are & How They Work

If you or your business doesn’t have at least a mediocre credit score (read: higher than 580), you may have a hard time getting a loan for yourself or your business. Either lenders won’t want to lend to you, or they may be willing to cover their risk by offering high interest rates or shorter loan terms (oftentimes, they may require both). Fortunately, credit builder loans were invented to help people and businesses with bad credit improve their credit scores and, ultimately, get the loan that they need.

Why Does Credit Matter?

The simplest answer is that credit is trust which is the basis upon which you (or other borrowers) borrow money. This means that if you want to borrow funds from a bank, a credit card, etc., they will want to see that you have a reliable repayment history. You will need to establish trust based on your previous payments and reliability, and this trust will make up your credit history, which will be the foundation for your credit score. What if you have not borrowed before so you have no credit history? For example, what if you were previously making a cash salary and paid for everything that way? Maybe you want to start a business of your own and you have not had a chance to establish credit? What if you had borrowed money a while ago and fallen upon hard times so you made late payments? Each of these scenarios are situations where taking a large, unsecured loan would not be possible because you have either no credit or bad credit, and lenders won’t likely want to lend to you because of the risk that you won’t repay on time or at all. Now, what can you do to rectify the situation?

One of the best possible ways to repair your credit is to take out a credit builder loan. These loans, sometimes called “fresh start loans,” are specifically designed for situations where your primary need is to raise your credit score, and your secondary need is to borrow money. The goal is to improve your credit status so that when you need cash, you will have the credit necessary to be able to borrow it. With credit builder loans, you make payments without receiving the money upfront. This is sort of a forced savings as well as a way to build your credit. The “lender” is not actually lending you any money until you make all the payments. The bank or credit union puts aside the money for you and you receive it when all of the payments have been made. It may also be possible to get a little bit of it at the beginning but at a very high interest rate.

Where Can You Get a Credit Builder Loan?

Credit builder loans are usually available through credit unions, community banks and online lenders. There are actually a few different types of loans used to build credit. The first is the most common one, as described above. The bank puts the money in a secure account for you, you make payments and then when the payments are finished the money is yours with the interest. Another type of credit builder loan is a secured loan. This locks up money you have in savings to secure your loan. This type of loan will have a relatively low interest rate because the loaner is not taking a risk. Again, you will not be able to access the money until it is paid back but it will help you establish better credit. The highest interest rate for a credit builder loan will be on an unsecured loan. You will get cash up front and you need to make timely payments. In that sense, this type of loan is akin to a credit card advance. The only way this type of loan will improve your credit is if you are extremely meticulous about the payments and of course are able to make each one including paying the additional interest.

There are three main credit bureaus that will allow you to check your credit score so that you know if you need to build up your credit in the first place. If one of these three major credit bureaus report that your credit score is low, you can double check with a second one to ensure that it is not a mistake. Assuming the credit score is accurate and needs improvement, then it is time to look into one of the credit builder loans that we have discussed. If all goes well, your credit should be improved in just a few months, and you should be able to get the loan you need.

Establishing good credit can be essential to both personal and business growth. When your personal credit report has significant blemishes, it can affect your business credit as well. Unfortunately, bad credit issues can mean that you may not get the loan you need to advance your personal or business goals. Understanding what credit is as well as why and when you need is very important for both your personal and professional lives. Make an effort to remain in good financial standing – the effort will (literally) pay itself off in the long run.

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