How To Get a Credit Builder Loan

A credit builder loan is a small loan designed to help you build credit. That's the main point of the loan — not to borrow funds. With this type of loan, you get approved for a small amount of money, typically between $300 and $1,000, and the lender will hold that in a secure account.

You'll pay off the loan each month, and once you've paid it off completely, the funds will be yours. The lender will report your payments to the credit bureaus, which then helps build your credit score.

MoneyLion offers a service to help you find personal loan offers. Based on the information you provide, you can get matched with offers for up to $100,000 from our top providers. You can compare rates, terms, and fees from different lenders and choose the best offer for you.

Here are the steps you'll take to get a credit builder loan:

1. Check your credit score, even if you don't think you have one yet.

2. Compare lenders, such as banks, credit unions or online lenders.

3. Choose a loan amount you can afford.

4. Apply online or in person.

5. Make monthly payments on time.

6. Get the money after completing your monthly payments.

Where Can I Get a Credit Builder Loan?

Much like personal loans, you can get credit builder loans through most financial institutions, including where you do your personal banking.

• Credit Unions: Often the most affordable options. You can also look at online lenders, which tend to offer fast approval.

• Community Banks: They may offer affordable options as well, especially compared to major banks.

• Fintechs: Apps like CreditStrong and Self offer credit builder loans.

You should compare options before deciding on a clender to ensure you get the lowest rate and the terms that work best for you.

Who Should Consider a Credit Builder Loan?

Credit builder loans don't make sense for everyone. You should consider a one if:

1. You Have No Credit History

Credit builder loans are a good option for people with no credit or a thin credit history, such as young adults who are just starting out and establishing their own financial footing.

2. You Are Repairing Credit

Credit builder loans can also make sense for anyone who needs to repair and rebuild their credit score after experiencing financial struggles.

For instance, if you're unemployed and had a period where you missed several credit card payments, taking out a credit builder loan and making on-time payments can help repair the damage.

3. You Can Use On-Time Payments To Improve Credit

Basically, credit builder loans are an option for anyone who wants to prove they can make on-time payments and have those payments positively impact their credit.

How a Credit Builder Loan Helps Build Credit

A credit builder loan helps build your credit by reporting your on-time payments to the credit bureaus. Payment history accounts for 35% of your credit score, so this alone can have a positive impact on your credit over time.

Credit builder loans also represent a new account type added to your credit mix, which can further boost your score. Credit mix, meaning the different types of credit extended to you, accounts for 10% of your score.

Also, for the maximum positive impact on your credit, the credit builder loan needs to be reported to all three of the major credit reporting agencies -- Equifax, Experian and TransUnion -- so confirm that your lender reports to all three before signing the loan agreement.

Credit Builder Loan vs. Secured Credit Card

Credit builder loans are an alternative to secured credit cards, which can also be used to build credit. With a secured credit card, you make a cash deposit when you open the account, and that deposit generally equals your credit limit.

While credit builder loans and secured credit cards are both tools for building credit, they differ in several ways.

Can You Get a Credit Builder Loan Without Credit?

You can get a credit builder without credit. In fact, these loans are designed for people with no credit or a thin credit profile looking to build their credit. You usually won't need a cosigner or a high income, either.

Approval requirements for this type of loan aren't as stringent as those for other personal loans. Lenders may look at other parts of your credit profile, like your bank history, in lieu of your credit score when reviewing your application.

FAQs

How much does a credit builder loan cost?

Credit builder loans are generally for small amounts, from $300 to $1,000, and you may need to pay interest as well as fees to take one out.

Can I pay off the loan early?

You may be able to pay off a credit builder loan early, but consider whether it's worth it, because sticking to the original payoff timeline will mean you have more on-time payments reported to the credit bureaus, which will have the most impact on your credit.

Do all lenders report to the credit bureaus?

Not all credit builder loans report to all three credit bureaus, but most do. Before you take out a loan, confirm with the lender that it reports to all three bureaus.

What happens if I miss a payment?

Missing a credit builder loan payment can negatively impact your credit score because the missed payment could be reported to the credit bureaus. Only use a credit builder loan if you can make each payment on time.

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