If you’re struggling to build a better credit score, then a credit-builder loan could be a step in the right direction. As a bonus, a credit-builder loan can help you build a little nest egg, too!
How Credit-Builder Loans Work
A credit-builder loan is a type of credit designed to help new and bad credit borrowers build a positive payment history. In order to build a long-standing credit history, the key is having reported payments on your credit reports – and a credit-builder loan gives you this opportunity. Payment history makes up the majority of your credit score: 35%.
Credit-builder loans typically start off around $1,000 or less. Terms for these loans are typically around 24 months. If you were to get a credit-builder loan of $1,000 for 24 months, your payment would likely be around $42 a month (not including interest). That said, they’re usually reasonable and easy for many borrowers to keep up with.
The loan is usually placed in a savings account. You make payments to the lender until you pay off the loan, and then the money is released to you! Most credit-builder loans require that you make all the payments on time to get the money back, so it’s important to take on a credit-builder loan that you can handle – so you can actually build a better credit score.
How to Get a Credit-Builder Loan
Credit-builder loans are offered by direct lenders, such as credit unions and banks. For the most part, they’re available for borrowers with less than perfect credit or those with sparse credit histories. They’re generally low-risk compared to larger loans for vehicles or houses, so, if you can prove you have the income, you may have decent odds of getting the loan.
A good way to increase your chances of qualifying for a credit-builder loan is to apply with a credit union where you’re a member. These lending institutions are member-owned and may be willing to work with you when your credit score is worse for wear if you’re a long-standing member. It also helps your chances if your accounts are in good standing.
Credit-Builder Loans Can Prep Your for Bigger Things
Many new and bad credit borrowers can struggle to get loan approvals, such as car loans, due to a lower credit score. Often, traditional lenders have high credit score requirements and even having the income to repay a loan may not be enough with a low credit score.
However, taking on a credit-builder loan before you apply for an auto loan credit can add some good repayment history to your credit reports, giving future lenders more confidence in you as a borrower.
Additionally, you get to keep the money from a credit-builder loan. And if you’re still a newbie to credit, a lender is likely to require a down payment for a car loan. Subprime lenders, or bad credit auto lenders, typically require a down payment of at least $1,000 or 10% of the vehicle’s selling price. A credit-builder loan can be a great way to save money for a down payment on a future loan while building your credit score at the same time!
Other Credit-Building Resources
There are other ways to build a better credit score, too. Credit reporting services, such as Experian Boost, can give you the opportunity to add your existing bills – like streaming services, water bill, insurance, and even rent payments – to your credit reports. By adding the bills already paying to your credit reports, you can build a good repayment history that raises your credit score. This proves you can repay things without having to add more expenses to your budget. You can visit our resources center for more information on credit reporting services.
If you’re in need of a vehicle right now but your credit score has seen better days, a subprime lender could help, too. An auto loan can be a great way to build your payment history since they're typically long-term loans.
These lenders assist first-time car buyers, bad credit borrowers, and even borrowers who’ve gone through bankruptcy. They’re signed up with special finance dealerships and Auto Credit Express has cultivated a nationwide network of these dealers. To get matched to a dealership in your local area that helps borrowers with unique credit situations, fill out our free auto loan request form.
