audreyA credit builder loan is a type of loan that can help you either repair your credit score or build it from scratch. One of the great things about them is that they don’t require that you have good credit initially. Most likely, you have never head of credit builder loans, but that is because they aren’t advertised often. In addition, they are usually offered by small and local community banks and credit unions. The purpose of these loans is to help people to build a respectable credit score. Here is more information about credit builder loans.
What Exactly are Credit Builder Loans?
Financial institutions want you to succeed because if you are their customer, you have a greater likelihood of helping them to make a profit long run. When you seek a credit builder loan, the lender sets very strict limitations that protects their assets.
A credit builder loan is referred to by a variety of names, including “starting over loans” or “fresh start loans.” If you need to restore your credit after being heavily in debt, you can talk to someone at your financial institution about getting a secured personal loan, which is available to people who need assistance to build or rebuild their credit.
There are also secured credit cards, which have always been thought of as helpful toward building credit. While they can be effective, you must have enough money in the bank to put down a security deposit toward a secured credit card.
A credit builder loan may be the best option for you. They are recommended for people who have an income but can’t afford to put a deposit toward a secured credit card. Credit builder loans offer a quick workaround for that situation.
How a Credit Builder Loan Works
You can apply for a credit builder loan if you have no credit or your credit is bad. If you are approved, the lender has strict rules in place specifically for their own protection. The money you borrow is deposited into a savings account and cannot be accessed until after you have paid back the loan in full.
If you pay back the loan by all of its terms, the bank or credit union will send a positive report to the major credit bureaus on your behalf. In 2013, there was a study done that showed that individuals who made timely payments up to six months for loans as small as $100 earned an improvement of 35 points on their credit scores.
In other words, by the time the loan term has ended, you’ll get the money, which is deposited into a savings account during the process, plus a better credit score.
Always make sure you pay off the loan on time. Any time you miss making payments, that too will be reported to the credit bureaus. Financial institutions don’t take too large of a risk when lending to consumers because they can always reclaim money when you fail to uphold your end of the deal.
About Credit Builder Loans’ Secured Installments
Not everyone who has poor credit has a low income. If you have money stashed away in the bank, you can easily take advantage of other options for paying back the loan: through installments or get a loan that is backed up by a certificate. In that scenario, your deposit toward the credit builder loan is used as collateral. The money is either frozen until you have repaid the loan or parts of it are frozen as the loan is repaid. You can borrow against that money if you have an account with funds at a community bank or credit union to restore your standing. If you acquired the loan through other lenders, you might be asked to borrow against the value of something valuable, such as your car.
Overall, a credit builder loan is a good option for rebuilding or building credit. The collateral considerably decreases the risk for the lender and reduces interest rates for the borrower. On average, interest comes to under 10 percent. Of course, you don’t get the funds until after the loan is paid back. If you are responsible and pay the loan back in a timely manner and in full according to its terms, you can really boost your credit.