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- A credit-builder loan can help borrowers start their credit journey on a positive note or work to improve their score.
- To choose the right credit-builder loan for your needs it's best to look out for how the monthly cost will fit into your overall budget.
- Account for your preferred method of communication when comparing options as some lenders only have online support.
While it may feel counterintuitive to take out a loan to improve your credit score, it can be a practical approach as long as you handle the loan responsibly. A credit-builder loan is designed to assist borrowers who need to build credit from square one or improve it.
After applying and being approved your loan balance will often be added to a savings account. By successfully making fixed payments you will build your credit and savings at the same time. When considering which option best suits your needs it is essential to look out for certain factors, similar to when shopping for a traditional personal loan.
6 factors to consider when choosing the best credit-builder loan
Credit-builder loans can be found at several sources including, credit unions, community banks and online lenders. When comparing options give special consideration to the following factors.
Although the goal of these sorts of loans is designed to build your credit, there is a cost to that formation. The annual percentage rate (APR) tends to fall between 4 percent and 16 percent, with credit unions often offering lower APRs. The higher the interest rate is, the more you will have to pay each month.
Make use of a personal loan calculator to ensure that you will be able to keep on the payments.
The cost to apply and keep up with your loan varies by lender. These small fees can account for the loan application, administration or a late payment fee.
To avoid costs accrued for missing payments it is best to sign up for automatic payments. If you are working with a tight budget it is wise to shop with lenders that advertise minimal or zero fees.
The loan terms are the period you have to pay off your credit-builder loan. In the case of these sorts of loans, borrowers can expect repayment terms of six to 24 months — but some offer terms up to 48 months.
The longer you extend your loan term the lower your monthly payment tends to be. Credit-builder loans are shorter-term than other loans you may come across, as the product is intended to be small amounts that are paid off quickly.
When comparing options with similar rates explore how special features offered could sweeten the deal. If you want consistent updates, look for a lender that will share FICO score changes. Also, look out for lenders that report to all three credit bureaus, given the primary purpose is to build your credit score. Other features lenders might offer include deferred payments to help those on a tight budget.
Credit-builder loans can be found at various sources, including brick-and-mortar banks or online lenders. When determining which source best fits your needs, consider how you prefer to do business. If you feel confident navigating your finances online, then an online lender is a good option. If you prefer additional, customized assistance, consider checking out a bank or crest union with offices in your area.
Smaller banks and credit unions may offer credit-builder loans. Just because they are less prominent institutions doesn’t mean that they are not trustworthy. However, not all lenders on the market are trustworthy.
To ensure you aren’t sharing financial information with a risky source check online reviews and the Better Business Bureau. Doing the extra research and seeking out actual customer testimonials from a third-party rating site can help you borrow with more confidence.
The purpose of a credit-builder loan is to do just that, build your credit. To achieve the financial strength that a good credit score brings it is essential to secure a loan that you can afford and pay off on time. When shopping pay close attention to your monthly payment and your specific needs.