Is a Credit Builder Loan Right for You?
When members lack a credit history or an unexpected financial event occurs resulting in missed payments and maxed-out credit, credit scores take a hit! Rebuilding a credit score may take time and effort, but the benefits pay off. A higher credit score opens the door to more affordable loan opportunities, saving you money over time.
One of the options available to people who have not established credit yet or have poor credit is a product known as a credit builder loan. It gives borrowers a chance to establish creditworthiness. If you think a credit builder loan could help your situation, explore its features and benefits to see if this solution is right for you.
What is a Credit Builder Loan?
A credit builder loan provides a unique opportunity for people with little or no credit to improve their credit score, also called FICO score. Each loan may have different terms and requirements so be sure to do your research, but the best credit builder loans offer rates as low as 9.99 percent to all borrowers, regardless of their credit history or score.
Requirements typically include steady employment, a stable income, and accounts with enough funds to ensure repayment. While this loan may sound too good to be true, it really does exist! Lenders who offer this solution are clearly community-minded and looking to help their local friends, family, and neighbors thrive.
How Does a Credit Builder Loan Work?
Although a credit builder loan isn’t complicated, there are some unique features that make it different. Like other loans, borrowers are expected to make regular monthly payments on the principal plus the relatively low-interest rate. What’s different about a credit builder loan involves how community members qualify. These are steps you can anticipate when taking out a credit builder loan.
1: Open a Savings Account
Your local lender usually will require you to put $1,000 in a savings account to back the loan. However, some may actually front the money to you. The money in the savings account remains in place until the borrower pays off the loan. Once the principal and interest have been cleared, the savings account money is freed up.
2: Pay Nominal Fees
Lenders usually charge at least a nominal fee to cover the work it takes to process and approve a credit builder loan application. Large corporations have a habit of charging exorbitant fees because they need to generate profits for their shareholders. Allegiance only charges a $49 application fee which is added to the total loan amount.
To discover how to build or improve your credit score, download our free guide:
3: Make Payments
Like other loan opportunities, credit builder loan borrowers are expected to make total, on-time monthly payments. This borrowing opportunity is designed to help community members improve FICO scores that help them secure other types of loans and credit. That’s generally why a credit builder loan is usually a short-term product with borrowers making fixed payments over about 14 months. The on-time payments demonstrate creditworthiness, which in turn raises your credit score.
4: Receive the Funds
Once your credit builder loan is paid in full, the funds are yours to keep. These credit rehabilitation products typically do not come with restrictions. So, you can use the money as you see fit.
The Benefits of Using a Credit Builder Loan
Because credit builder loans are often part of a strategy to raise FICO scores and gain access to wide-reaching borrowing opportunities, they deliver tremendous long-term benefits. This holds particularly true for people with blemishes on their repayment histories and those who effectively have no credit. These rank among the common benefits associated with credit builder loans.
- Improved Credit Score: As borrowers make regular monthly payments, each installment is reported to the three major credit bureaus — Equifax, Experian, and TransUnion. This information goes into the person’s credit history, making a positive impact on their FICO score. Borrowers may see their score tick up before the loan is repaid in full.
- Lower Requirements to Qualify: As a secured loan product, the qualification bar is set significantly lower than many other options. Applicants often get approved despite poor credit scores or no credit score at all. Local lenders are looking for applicants to simply demonstrate they can repay the loan. Some lenders do not even pull credit when approving a credit builder loan.
- Establish Credit: Young adults often struggle to establish credit and build a healthy FICO score. A credit builder loan can be a critical asset in establishing a credit history as soon as they turn 18 years old. Getting a quick start on proving creditworthiness leads to obtaining a car loan and mortgage approval sooner.
- More Flexibility: Unlike auto, boat, or home loans, the funds can be used for whatever legitimate purpose borrowers desire.
It’s also important to note that not every lender performs a hard credit pull when processing applications. Formal requests on the credit bureaus typically result in FICO scores dipping, at least temporarily. Be sure to ask questions before you apply for your credit builder loan.
Finding the Best Credit Builder Loan
In terms of the best place to secure a credit builder loan, members of the community usually start at local credit unions. Credit unions generally provide financial coaching, resources, and support to help community members through the process. They always have the members’ best interest in mind, not a sales goal they are trying to hit despite what is best for the person sitting across from them.
When comparing lenders, be sure to compare features such as interest rates, repayment terms, processing fees, loan amount, and credit score requirements.
What You Will Need to Apply for a Credit Builder Loan
It’s generally a good idea to conduct some due diligence and know where you stand financially before applying for any loan. The friendly loan processing professional will require specific documentation to approve your credit builder loan application or provide information about what to do next. These are steps to consider before applying.
Review Credit Reports
You can get a free copy of your credit report from Experian, Equifax, and TransUnion every 12 months. Request copies online and review them for any errors and issues you can correct.
Gather Your Records
As a formality, you will need personal identification documents. Gather items such as your Social Security card, driver’s license, pay stubs, mortgage or rental payment information, tax returns, and bank accounts.
Submit an Application
After comparing rates, fees, and terms, get in touch with a trusted loan officer or simply apply online. Bring all of your documents to a branch and discuss the best option to serve your goals. You can anticipate a response within a couple of days if everything is in order.
Use Your Credit Builder Loan Responsibly
The importance of responsibly repaying your credit builder loan cannot be understated. This product can help improve your FICO score and open the door to essential loans and lines of credit at lower rates. By making on-time payments, monitoring your progress, and utilizing financial coaching resources, a credit builder loan serves as a stepping stone to improved financial opportunities.
Allegiance Has a Credit Builder Loan for You
At Allegiance Credit Union, we offer credit builder loans that help you build or improve your credit and get closer to your financial goals. For additional resources relating to raising or building your credit score, review our free “How Can I Raise My Credit Score In 30 Days" guide, free financial coaching opportunities, and additional free resources.