Credit Builder Loan
BeginnerA credit builder loan is a small loan designed to help people with little or no credit history, or poor credit, establish a record of on-time payments, in which the borrowed money is usually held in a locked account until the loan is repaid.
People with no credit history can find it hard to get credit, but they cannot build a history without credit. Credit builder loans address this problem.
With a typical credit builder loan, the lender places the loan amount in a savings account or certificate of deposit that the borrower cannot access. The borrower makes regular monthly payments, which the lender reports to credit bureaus. When the loan is fully repaid, the borrower receives the money, sometimes with some interest, minus any fees.
For example, a borrower might take a credit builder loan of 1,000 repaid at about 88 a month over a year. After twelve months of on-time payments, they receive the 1,000 and have a year of positive payment history.
Credit builder loans are offered mainly in the United States, by credit unions, community banks and online lenders. They can be a useful step, but missed payments are reported too and can harm credit. Borrowers should compare fees and interest, and consider alternatives such as secured credit cards.
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