What they are and how to get one

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It can be difficult to access funds if you have a poor credit history or no credit history at all.

But one option is a home equity loan – a specific type of loan designed to help borrowers build credit.

Here’s what you need to know about loans to creditors:

Where to find a credit builder loan

You can find credit-creating loans at a local bank or credit union, but you’ll probably have better luck finding an online lender that specializes in this type of loan.

Here are some lenders who offer loans to creditors. Note that these are not credible partners.

Advice: Depending on your credit history, you may be eligible for a lower interest rate with a Personal loan, so don’t count them as an option.

If you decide to take out a traditional loan to create credit, be sure to keep the funds in a safe place so that you can repay the loan as agreed.

Check: How to get a $ 5,000 personal loan

How to get a loan to create credit?

When you take out a credit builder loan, you make regular payments like any other installment loan. But unlike a traditional loan, the lender will deposit your repayments into a dedicated savings account. At the end of your term, you will get the balance of this savings account less interest and fees.

Unlike some traditional loans, it is usually very easy to qualify for a credit builder loan. These loans are designed for borrowers with bad credit, so you don’t have to worry about having good credit to apply.

Whether you have a series of late payments in your past or no credit history At all, lenders who offer home builder loans usually focus only on your income when considering your application.

In addition to your income, the lender may also ask for:

  • Employment verification
  • Information on savings and existing debts
  • Personal data to verify your identity and your ability to repay the loan
Advice: If you are considering taking out a traditional personal loan to create credit, keep in mind that it may be more difficult to be eligible for a personal loan compared to a credit builder loan.

However, some lenders with less stringent requirements offer personal loans for bad credit.

Whatever you decide, be sure to consider as many personal lenders as possible to find the loan that’s right for you. Credible makes this easy – you can compare your prequalified rates with multiple lenders in two minutes.

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What are the advantages and disadvantages of a credit builder loan?

Loans to creditors may make sense to some people, but they are not the right solution for everyone. Here are some important pros and cons of credit-creating loans to consider first:

Benefits

  • Reported to credit bureaus: Loans to credit originators show up like any other regular loan on your credit report. As long as you make payments on time, a creditor loan could help you build up credit over the life of the loan.
  • Easier to qualify than a standard loan: You could get approved quickly with no credit or bad credit. Lenders who offer credit creator loans generally only consider your income for approval.
  • Also acts as a savings account: At the end of the loan, you will get your money back less interest and fees.

The inconvenients

  • Must wait for your money: Unlike a traditional loan, the time to finance for a credit builder loan, it is only at the end of your repayment term. You’ll pay off a home builder loan for a period of time, then get your money back at the end of the term minus interest and fees. If you need the cash quickly, you will need to consider another type of loan.
  • Interest and fees: Interest rates on loans to creditors can be high – sometimes exceeding 10% with some lenders. Although you will get a refund at the end, this interest and any lender fees will be taken from your overall balance.
  • Missed payments can always hurt your credit: Although loans to creditors are used to repair credit, you will still have to rely on payments on time. Missing payments on a credit builder loan could hurt your credit, just like any other loan.

Learn more: Personal loan rates

Do loans to creditors really work?

Yes, loans to creditors can work. Just like a personal loan or a credit card, you can use a credit-builder loan to add a positive history to your credit report and improve your credit score.

Keep in mind: The effectiveness of credit-creating loans mainly depends on the borrower.

In order for a credit builder loan to do its job, you must make payments as scheduled each month. If you miss a due date, you could end up doing more harm to your credit than good.

It usually takes about two to three months to establish credit for the first time, depending on Experian. Depending on the scoring model used, establishing a credit score can take anywhere from a few months to six months.

Advice: If your credit is poor, your credit repair may take much longer.

But starting with 100% on-time payments with a credit builder loan can be a smart first step in repairing your credit.

Learn more: Short term loan

Alternatives to credit-creating loans

If a credit builder loan isn’t right for you, there are options that might help. Here are some alternatives to consider:

  • Unsecured personal loan: If you have decent credit, you may be eligible for a small personal loan that you can repay to further increase your credit. If you are not eligible on your own, you can apply for a co-signed personal loan with some lenders. Having a creditworthy co-signer could help you get approved.
  • Guaranteed personal loan: Unlike an unsecured personal loan, a secured personal loan requires that something of value be deposited as collateral. Because there is less risk for the lender, it might be easier to qualify for a secured personal loan.
  • Secure credit card: To open a secured credit card, you will need to provide a refundable deposit. The amount you deposit will usually be the same as your credit limit. As long as you make payments on time, your credit will likely improve. Some lenders will allow you to replace your secure card with an unsecured one after a certain number of on-time payments, which means you will get your deposit back.

Everyone’s financial situation is unique, so it’s a good idea to research various options to find the right credit option for you.

If you are considering a personal loan to increase your credit, use our personal loan calculator below before borrowing to estimate how much you will pay for a loan.

Enter your loan information to calculate how much you could pay

Total payment
$

Total interest
$

Monthly payment
$

With a
$

loan, you will pay
$

monthly and a total of
$

interest over the life of your loan. You will pay a total of
$

during the term of the loan.


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About the Author

Eric Rosenberg

Eric Rosenberg is a credible personal finance expert. His work has been featured on Business Insider, Investopedia, The Balance, The Huffington Post, MSN Money, Yahoo Finance, Mint.com and more.

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