Getting a loan may seem impossible if you have no credit or has a bad credit. When lenders consider loan applications, they usually will look into whether the applicant has the ability to pay the loan back. The credit history will be checked because it shows an individual's debt and payment history and it determines how likely the applicant can pay off a loan in the future. If you have no debt and therefore no loan repayment history, has a consistent record of late payments or loan defaults, the lending institution will consider your application to be too risky.
In order to start building a strong credit history that will eventually qualify you for the loans you apply, credit builder loans come into play.
What is a credit builder loan?
A credit builder loan takes care of the amount borrowed in a bank account while you make payments, therefore building credit. Once you pay off the loan, the money will be given back to you. It is designed to assist people who have poor credit or those who have little or no credit history build credit. It helps people get a good score that makes approval for credit cards and loans highly possible.
Although credit builder loans do not ask good credit for approval, they do require you to have enough income to make payments. The money you borrow will be held in a bank account while you’re making on-time payments which are reported to the three major credit bureaus Equifax, Experian, and TransUnion. The payments you make on-time have a big impact on the calculation of your credit scores.
Credit-builder loans do not get advertised as much and smaller financial institutions including credit unions and community banks are the generally the ones that offer them. They are also called “Fresh Start Loans” or “Starting Over Loans”.
Finding Credit Builder Loans
The can often find credit builder loans being offered by the following institutions:
Banks
You won’t find credit builder loans in national banks but you could find secured personal loans. Local banks on the other hand usually offer a financial product exclusively designed to help build your credit.
In Minnesota, Sunrise Banks provides credit builder program to individuals allowing them to borrow up to $1,500 which is then placed into a certificate of deposit and earns interest while you’re making payments.
They will give your money back once the loan is repaid and even earn a refund of 50% of the total interest you paid on the loan if you make on-time payments. Your payment history will be reported by the bank to Experian, Transunion, and Equifax.
There are different programs offered by various banks but generally, local banks are more focused on helping their communities with credit builder loans so be sure to check them out.
Credit Unions
Credit Unions are similar to local banks because they too are community-based financial institutions. Since they’re owned and operated by their members, they have any responsibility stockholders. However, they still focus on helping locals grow a positive financial portfolio.
A great example of a credit union that offers credit builder loans for up $1,000 is the 1st Financial Federal Credit Union in Missouri. They require that you pay back with interest over 12 months and when you do, your payment history will be shared with the credit bureaus as well as give you the 50% of the interest you paid refunded if you made on-time payments.
It will help if you conduct your own research to see what credit unions in your area that offers similar credit builder loans.
Nonprofit Organizations
Another institution with a goal to help people rebuild their credit are nonprofit organizations found all over the country. Consumer Action, for example, is a nonprofit advocacy group that offers the things you need to help you build credit. You can even get tips from them regarding your tax filing, identity protection, how to identify scams, and more. You’ll be able to manage your finances well if you use resources like this one because it helps you develop positive habits financially.
Online
We live in a highly advanced world that you can even take out a small loan with a 12- to 24-month term online. The money you borrow is placed into a CD which earns interest and once your loan is paid off, you get your money from the CD.
Although you can get the same resources through your local bank or credit union, an online lender is still a great option if you don’t have access to a credit builder program in your community.
