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Posted by Tiffany Gaskin

What Is A Credit Builder Loan?

What Is A Credit Builder Loan?

A credit builder loan is a type of loan exclusive to helping people build a positive credit history. It features an installment loan system with fixed monthly deposits; these deposits are documented and forwarded to the credit bureau with the sole purpose of establishing a good credit score.

The populaces in the following categories; freshly divorced who want to start over, new immigrants or those who recently graduated may not have the required credit record to get a loan or acquire a credit card. This type of loan system will be ideal for such persons or anyone who has no credit record. 

About 26 million people or more in the U.S. have no credit record, and some others have poor credit scores. A credit builder loan does not just build a credit record from the start; it also improves poor records, showing the ability and capacity to repay a loan. A good credit score is one of the requirements for applying for a large loan or a credit card.

How does this Loan system work?

This works like the regular loan disbursement; however, the only difference is that the lender won’t give you the money directly until you have paid back the loan you requested in full. Full payment alongside interest must be made over a specified period before granting full access to the money. Since the lender is in complete control of the funds, there are usually no risks attached; and that’s why lenders are always willing to give credit builders loans to people who have no record or those with poor credit scores to improve their record. 

Once the loan is approved, the lender gives a detailed report to agencies that report credit- This, in turn, builds credit scores leading to a good history and reputation of paying loans on time.

This is the usual routine; however, some financial institutions may release part of the money once payment has commenced depending on the agreement made at the beginning of the process.

The amount, payment time frame, and interest rates the financial institutions offer differ. Usually, the amount provided is between $300-$1000 and time frames of like six months to two years. Small scale business owners who desire expansion have utilized this method to accelerate their loan approval from financial institutions that offer a large amount of money. 

It is important to note that building one's credit score is in stages; this means that a one-time credit loan's influence on someone who has been building credit consistently over a first-time borrower will be more pronounced.

Things to Consider Before Applying for a Credit Builder Loan 

Before applying for a credit builder loan, here are a few things to ensure or look out for:

The lender’s connection to the credit bureaus;

Ensure the financial institution gives a detailed report of your payment to the credit bureaus. Usually, lenders often check your record from just one credit bureau- so your records must be submitted or reported to all credit bureaus.

Your ability to stick to terms and conditions 

You need to ensure you stick to the terms and conditions drafted out by the financial institution regarding the amount to be deposited, the length of payment, and other arrangements; this is important to prevent a flawed report as this can hinder the benefits you have initially hoped for. Defaulting can decrease your score or even prevent you from building credit.

What do financial institutions offer credit builder loan requests for?

Apart from your credentials, you will need to show that you have a source of income or multiple streams of income that can enable you to pay at least $50 per month (this depends on the financial institution's terms). This proves your ability to pay back the loan given.

Also, you will need to settle all unresolved financial issues; having unsettled financial payments may discourage lenders and may affect your application.



Tiffany Gaskin
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