Building a loan history is not as simple as securing a traditional loan and repaying it. Sometimes consumers – such as the newly divorced, newly married, or newly immigrant – find it difficult to have sufficient credit to take out a loan or open a credit card.
Credit builder loans can be an ideal way for someone who has no creditworthiness to start building a loan. There are approximately 26 million US adults in this “credit invisible” situation. Refurbishment loans give borrowers – whether building or rebuilding their creditworthiness – an opportunity to demonstrate that they can make regular payments.
If you take advantage of a credit builder loan successfully, you can potentially improve your credit history and, with it, your credit score. This could help you qualify for larger loans and obtain unsecured credit cards for longer periods of time.
[Read: Best Rewards Credit Cards.]
How Does a Credit Builder Loan Work?
Reconstruction loans are different from other loans in that the financial institution requires you to pay before you receive the full loan amount. This is in contrast to a typical installment loan, which gives you the loan funds instantly that you repay over a period of time.
“You don’t need the money, you need better credit,” said Michael Emancipator, vice president and regulatory counsel for Independent Community Bankers of America.
At the beginning of the lending process, the lender will transfer their funds to a locked account and then you will start making regular payments. Depending on the agreement, the lender can provide part of the funds after the payments have started or wait until the payments are completed before lending.
“The customer does not have access to the money, but pays amortized payments along with interest over 12 months or any period,” says Emancipator. “In the end, they can access the money.”
Loans are offered in a variety of amounts, payment terms, and interest rates:
– The amounts generally range from $ 300 to $ 1,000.
– Payment terms are usually between six months and two years.
– Funds are deposited into your savings account.
“It’s a wheeled loan – so easy to come by, easy to repay,” said John Ulzheimer, president of the Ulzheimer Group and a national credit expert who previously worked with Equifax and FICO. “Unless you’re really buckled up, really irresponsible, it should work perfectly.”
A word of caution: a credit extension loan will not affect the creditworthiness of the customer conversion loan as much as that of the first borrower. Still, says Jordan van Rijn, former senior economist for the Credit Union National Association, it can help.
What to look for in a loan to build credit
Before getting a credit builder loan, make sure the lender reports your payments to all three credit bureaus – TransUnion, Equifax, and Experian. Since lenders often only consult one Schufa when granting a loan, it is important to cover all three.
You should also make sure that you can meet the loan terms, especially the amount of the monthly installments and the term of the loan. If you cannot make the payments on time, the benefits you are hoping for from the construction loan could be diminished or backfire completely.
What Are The Requirements For A Credit Builder Loan?
A lender may offer credit as an option when trying to get a loan or to rebuild credit after a major problem, such as bankruptcy.
Once you get something positive on your credit report, “the way lenders and service providers look at you changes,” says Ulzheimer.
For example, college graduates who haven’t received a credit card may have better chances of renting a home or opening a cell phone account thanks to the positive creditworthiness of a home loan.
There are few credit requirements for this type of loan. All you have to do is:
– Show that you have a source of income that will allow you to make payments of around $ 50-100 each month for the life of the loan.
– Have no unresolved financial judgments.
When you have financial judgments against you, “we would normally advise people to cash these out first,” says van Rijn.
[READ: Best Bad Credit Loans. ]
Where Can I Get a Loan Builder Loan?
Most likely, you can get a credit builder loan from community banks, credit unions, or online lenders.
Loans are not a big profit maker, which is why some financial institutions don’t offer them. Still, some local banks and credit unions rely on these low risk products to lead customers to more traditional credit instruments like auto loans and mortgages.
“You won’t necessarily see customers going to a bank and asking about that particular product,” says Emancipator. “But it could get into financial distress from a banker to a customer who has no creditworthiness to step into a more traditional product.”
There are about 5,300 credit unions across the country, and about a quarter of them offer some form of credit for lending, says van Rijn. Overall, almost half of the credit unions nationwide have access to the loans. While you have to be a member to get a loan from a credit union, it is pretty easy to become a member. Just look for a location close by and see what the requirements are, says van Rijn.
Alternatively, you can search for lender loans online to see which lenders are offering them. It can also be a lender with a physical presence somewhere in the US but who does the lending business online.
[Read: Best Online Banks.]
Other ways of building credit
Taking out a loan for lending is not the only way to build your credit and improve your score. You can also:
– Open a secured credit card. Unlike more typical unsecured credit cards, secured cards require you to make a deposit – which usually becomes your line of credit – before you can use the card. Unlike the home loan, you have instant access to the funds. Make your payments every month and pay off the entire balance to avoid interest.
– Become an authorized user. With some credit cards, the primary cardholder can add an authorized user to the account. The primary cardholder is still liable for the debt, but the authorized user can benefit from having a credit card account on their credit history. If this strategy is well managed, it is a great way to build credit.
– Get help from a co-signer. If you can’t get credit, a co-signer with good to excellent credit can help. A co-signer can assure the lender that someone is making the payments, be it you or the co-signer. This is one solution parents might choose when looking to buy a car for a child who is a college student and doesn’t have a job yet. As soon as the children start working, they can take over the payments.
– Join a credit group. This type of lending has been around for many years in different cultures with the people in the group lending money to one another. Participating in a circle of credit can help your credit history and score if the organization running the circle reports to the three credit bureaus.
Loans can be a great choice to improve your credit score, but there is no guarantee of success. You have to show that you take credit seriously and the best way to do it is to make payments on time.
[Read: Best Personal Loans.]