Key takeaways
- A credit-builder loan can help borrowers start their credit journey on a positive note or work to improve their score.
- To choose the right credit-builder loan for your needs, it’s best to look out for how the monthly cost will fit into your overall budget.
- Account for your preferred method of communication when comparing options, as some lenders only have online support.
While taking out a loan to improve your credit score may feel counterintuitive, it can be practical if you handle the loan responsibly. A credit-builder loan is designed to assist borrowers who need to build or improve credit from square one.
After applying and being approved, your loan balance will often be added to a savings account. By successfully making fixed payments, you will build your credit and savings at the same time. When considering which option best suits your needs, it is essential to look out for certain factors, similar to when shopping for a traditional personal loan. Also, assess where it makes sense to find the best credit-building loans for your situation.
6 factors to consider when choosing the best credit-builder loan
When comparing options, consider the following factors to find the best credit builder loans.
APR
Although these sorts of loans aim to build your credit, there is a cost to that formation. The annual percentage rate (APR) — interest rate and fees, expressed as a percentage — tends to fall between 5 percent and 36 percent. Credit unions often offer lower APRs, some as low as 0 percent. The higher the APR is, the more you will have to pay each month.
Bankrate tip
Make use of a personal loan calculator to ensure you can keep up with the credit-builder loan’s payments.
Fees
The cost to apply and keep up with your loan varies by lender. These small fees can account for the loan application, administration or a late payment fee.
It is best to sign up for automatic payments to avoid costs accrued for missing payments. If you are working with a tight budget, it’s smart to shop with lenders that advertise minimal or zero fees.
Loan terms
The loan terms are the period you have to pay off your credit-builder loan. In the case of these sorts of loans, borrowers can expect repayment terms of six to 24 months — but some offer terms up to 60 months.
The longer you extend your loan term, the lower your monthly payment tends to be. Credit-builder loans typically have a shorter term as the product is intended to be small amounts paid off quickly.
Additional features
When comparing options with similar rates, explore how special features offered could sweeten the deal. If you want consistent updates, look for a lender that will share FICO score changes.
Also look for lenders that report to all three credit bureaus, given the primary purpose is to build your credit score. Other features lenders might offer include deferred payments or the ability to move your due date.
Customer service
Credit-builder loans can be found at various sources, including brick-and-mortar banks or online lenders. When determining which source best fits your needs, consider your business preference.
If you feel confident navigating your finances online, an online lender is a good option. For additional, customized assistance, consider checking out a bank or credit union with offices in your area.
Reputation
Smaller banks and credit unions may offer credit-builder loans. Just because they are less prominent institutions doesn’t mean they are not trustworthy. However, not all lenders on the market are trustworthy.
Check online reviews and the Better Business Bureau to ensure you aren’t sharing financial information with a risky source. Doing the extra research and seeking actual customer testimonials from a third-party rating site can help you borrow more confidently.
Where to find credit-builder loans
You can find credit-builder loans from several different places. When comparing your options, consider multiple types of financial institutions to get the best deal for you, including the following:
- Banks: Community banks can be a good place to secure a loan if you like the in-person customer service and local offices these establishments typically provide. Choosing a bank you already do business with may afford you a better chance of qualifying and potentially better rates.
- Credit unions: Credit unions often have local offices and in-person customer service. However, credit unions operate as nonprofits and typically have lower overhead costs than banks, often translating into more affordable services for the consumer.
- Online lenders: Online loan lenders may offer some of the best credit builder loans. The lack of brick-and-mortar overhead can translate into more competitive rates. You will have to do more background research through sources like the Better Business Bureau to make sure any online lender you choose is legitimate since you can’t see them in person.
- Lending circles: This is an alternative option. These groups contribute a fixed amount of money into a shared pool. Then, each member of the group gets funds on a rotating schedule, usually at little to no cost. Look for lending circles that are managed by reputable nonprofits and institutions that can report to the credit bureaus to help you build credit.
Next steps
The purpose of a credit-builder loan is to do just that: build your credit. To achieve the financial strength that a good credit score brings, you must secure a loan you can afford and pay off on time.
When shopping, pay close attention to your monthly payment and specific needs. Doing so will help you get a credit-builder loan that’s best for you.
Read the full article here