Why Trust Us

Investopedia researchers collected over 320 data points from 12 companies to evaluate the factors most important for people considering a credit builder loan. We used this information to rank each company based on APRs and fees, customer experience, educational resources, and other factors to support our mission of providing unbiased, comprehensive reviews and helping🔴 you make the right financial decisions. Investopedia launched in 1999 and has ꦆbeen researching and evaluating credit builder loans since 2023.

How Does a Credit Builder Loan Work?

A credit builder loan is an 澳洲幸运5官方开奖结果体彩网:installment loan that helps borrowers build or repair their credit. It is usually for a small amount, from a few hundred to a few thousand dollars, and may not require a credit check. This type of loan is meant for individꦑuals with bad credit or who have to establish their credit history. But it isn't like a traditional loan where you receive a lump sum from the lender after approval

With a credit builder loan, the lender deposits the money into an interest-bearing account like a savings account or a 澳洲幸运5官方开奖结果体彩网:certificate of deposit (CD). This vehicle acts as security or collateral against the loan. You can access the money in the account (less any fees, if applicable) after you've repaid the loan in full by m💦aking regular, fixed payments each month. The lender reports your payments to the credit bureaus, which can help build or re-establish your credit.

Common Credit Builder Loan Terms to Understand

• Credit score: A 澳洲幸运5官方开奖结果体彩网:credit score is a three-digit score that lets creditors know about your creditworthiness. A high credit score means you're creditworthy. As such, you'll be approved faster and get a better rate. A lower credit score means you may be denied a loan or have to pay a higher interest rate upon approval.
• Credit report: A 澳洲幸运5官方开奖结果体彩网:credit report is a document that details your 澳洲幸运5官方开奖结果体彩网:credit history. The report is prepared by a credit bureau or reporting agency. It contains your personal information and details about your debts, including your lenders, amounts lent, amount owed, and payment information. Your credit report also notes any credit inquiries and derogatory remarks like written-off accounts and bankruptcies.
• Collateral: 澳洲幸运5官方开奖结果体彩网:Collateral is an asset used to secure a loan. With a credit builder loan, the lender sets aside the loan amount into a savings account or CD, which acts as collateral. The hold on the collateral is released as soon as the loan is paid off.
• Interest rate: The 澳洲幸运5官方开奖结果体彩网:interest rate on your loan represents the cost of borrowing. Your rate is a percentage of your loan amount. The rate you pay is based on the type of loan and lender, your creditworthiness, the economic conditions, and how much you borrow.
  

Pros and Cons of Credit Builder Loans

Pros Explained

• Help build or restore credit: As the name implies, a credit builder loan can help you build or 澳洲幸运5官方开奖结果体彩网:repair your credit. You have an added incentive since you don't get the money upfront like a traditional loan.
• Qualify with bad or no credit: Unlike traditional loans, you don't need to have good credit to qualify—you don't even need any credit. This makes it easier to qualify.
  
• May not require a hard credit inquiry: Some lenders don't require a 澳洲幸运5官方开奖结果体彩网:credit check, so you may easily qualify. You also won't have a hard inquiry on your credit report.
  

Cons Explained

• Fees and interest apply: Although it isn't a traditional loan, you are still required to pay interest and may also be charged additional fees.
• Only small loan amounts: Credit builder loans don't allow you to borrow large sums of money. Rather, they tend to be for smaller amounts, usually ranging from a few hundred to a few thousand dollars. But that isn't necessarily a bad thing, as the intent is to help you establish or rebuild your credit.
• No immediate access to money: When you're approved for a credit builder loan, you don't receive a 澳洲幸运5官方开奖结果体彩网:lump sum payment the same way you would when a lender funds a traditional loan. Rather, the lender sets aside the money in a savings vehicle, which you can only access once the loan is paid in full.

How to Get a Credit Builder Loan

Follow these helpful steps to get a credit b༒uilder loan:

1. Compile a list of lenders: Start by exploring credit builder loan options at the bank or credit union where you do business. You can also search for other lenders to see what they have to offer. Be sure to research loan terms. interest rates and fees, how much you can borrow, and how much you'll get once the loan is paid off. Ensure they report to the credit bureaus, so you know it's helping your credit situation.
2. Check for additional costs: You can make a better decision about which lender to choose if you know about any additional fees or charges you may have to pay. Be aware of this before you apply so you can be fully prepared.
3. Review your budget: Ensure that the loan amount and monthly payment make sense for your budget. You don't want to overextend yourself with a large amount that you can't afford.
4. Gather additional materials: Lenders may require supplementary information and documents, including proof of identity, income verification documents (employer letter or paystubs), and recent 澳洲幸运5官方开奖结果体彩网:tax returns. Having these handy before you apply can help speed up the process.
5. Apply: Complete the application with the lender and submit your additional documents if needed.
   
6. Repay the loan: Once you are approved and sign your loan documents, you can begin repaying the lender. Your contract will outline the loan terms, payment amount, and due date as well as when the final payment is due. Remember, you're using this loan to help your credit score, so make your payments on time every month.

Methodology

To rate credit builder loan providers, we collected hundreds of data points from 12 leading lenders. We researched interest rates, fees, loan amounts, repayment terms, and other factors. We evaluated this data using a rigorous mathematical model t💫o develop our star ratings. In all, we weighted and scored 21 of the 29 factors, sorted into three broad categories:

• Loan Costs (APRs, origination fees, and four other factors): 38%
• Loan Features (Loan terms, loan amounts, and seven other factors): 34%
• Lender Reputation & Customer Service (Online experience, Combined Consumer Review rating, and two other factors): 28%

To maintain the integrity of the data following collection and analysis, Investopedia’s compl🎀iance team monitors changes to key details, like interest rates and fees. Compliance team members then update our pages to ensure they are accurate as of the date on the byline.