Bad Credit Boot Camp

An OppLoans Guide to Understanding Your Credit, Credit Report, and Credit Score.

Credit-Builder Loans

A Credit-builder loan is a small personal loan taken out for the sole purpose of building credit.16 This kind of loan is available at many banks, credit unions and online lenders, and they tend to range from around $500 to $1,500. In some cases, these loans serve double-duty, acting as a much-needed cash injection during a financial emergency while helping to build the borrower’s credit as they pay it off, but most people who take out this kind of loan do it for the sole purpose of raising their credit score.17

The safest type of credit-building loan for both the lender and the borrower is called a pure credit-builder loan. Unlike other loans, which give you the lump sum of your loan up front, a pure credit builder loan is more like a forced savings account. The lender will give you a set amount of money, but keep it in a locked savings account that you can’t access until you’ve paid the full cost of the loan. These loans can be really beneficial to cash-strapped consumers who need to build credit. No money is required up front, and when you’ve paid off your entire balance, you have a nice chunk of change waiting for you in a savings account, which you can use to start an emergency fund or 401k.18

Standard secured loans can also be used to build credit. Secured loans require the borrow to use the money they have in savings as collateral for the loan. The money in your collateral account will be frozen until you begin to pay off your loan, and as you continue to make payments on time, more funds from the frozen account will become available to you. Secured loans are nice for anyone on a budget, as their interest rates are typically much lower.18

Taking out an unsecured loan can help build your credit and act as a safer alternative to predatory payday loans. Unsecured loans give you access to the lump sum of your loan up front, and an installment loan is probably your safest bet here. Unsecured installment loans allow you to make a set payment every month for a set amount of time until your loan is paid off. This set payment will include both the amount you borrowed, and the total amount you owe in interest, so you’ll know before you even start making payments exactly how much this will cost in the long run. These loans do typically come with higher interest rates, but as your credit score increases, the amount you’ll be required to pay in interest on just about everything goes down. This is a rare case where spending money initially will help you save it in the long run.18

Remember: if you want to take out a credit-builder loan, don’t get antsy and pay it off early. Credit building credit is a process, and you need to use all the time allotted to make regular monthly payments that will eventually show up on your credit report, and prove that you are a responsible borrower. Most loans will take six months to affect your credit score, so there’s no rush to get it paid off.

Lucy Luzarony Josiah Nelson – 

“Credit builder loans are often called secured loans. Basically, your bank or credit union gives you a loan. The most common amount for these loans is $1,000 over 12 months. The key difference between this and a regular loan, though, is that the proceeds go into a locked savings account. This means that you make the payment each month and at the end of the 12 months, you get the principal back ($1,000 in this case). The advantage is adding diversification to your profile. Creditors usually like to see a mix of credit beyond just credit cards. The disadvantage is that you are basically paying interest on your own money. Though rates for these loans are usually low, it’s still money you’re paying for the bank to take zero risk at all.”

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