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What is a Builder Loan?
Worried about your credit score? Or maybe you don’t have any credit history at all? Then a builder loan may be the right answer, as it can help establish a trustworthy line of credit without ever using a credit card.
A credit-builder loan isn’t usually considered a traditional type of loan because a lender puts the loan balance you choose into a savings account. As this saving account matures, you’ll make fixed payments toward it over several months, and the bank will return the total balance at the end of the loan term. This is a method for building credit and saving money at the same time.
How Do Credit-Builder Loans Work?
In increments of $300 to $1000, credit- builder loans are payable over six to twenty-four months, but you won’t have access to the funds until that time frame is over.
But if you make timely payments, the lender reports to your three major credit bureaus (Experian, TransUnion and Equifax) will look fantastic. And once your loan term is up, you’ll have savings you didn’t ever have before, making a credit-builder loan doubly useful.
Now when it comes to choosing a specific loan amount, we usually recommend considering a small loan with easily affordable monthly payments. Especially if you’re on a tighter budget, as repaying the loan on time is the most important factor for your credit scores.
You’ll pay interest on the loan, but the lender may return a portion of that interest—sometimes referred to as “dividends” by the lender—to you at the end of the loan term. When choosing a credit-builder loan, make sure you understand its interest rate, any fees you’ll pay, and the lender’s policy on whether you’ll receive the interest that has accrued.
Although you may not need to undergo a traditional credit check to apply for a credit-builder loan, using your credit score as a baseline for approval can prove to be very helpful. Some lenders may use this banking history through the consumer reporting agency ChexSystems towards your decision.
To get most credit-builder loans, you’ll need to provide some or all of the following:
- Employment information
- Pretax monthly income (lenders may allow you to keep any alimony or child support you receive out of this total)
- Pay stubs as proof of income
- If self-employed, tax returns as proof of income
- Total housing payment
- Other loan balances
- Checking and savings account balances
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