There’s a lot to know about credit scores. But one thing that everybody knows is that if it’s low, you need to get it up.
Raising your credit score can help you get the loans you need to make major purchases and keep your interest rates lower.
One way to improve your credit score is through a credit builder loan.
But, what is that, and how can it help you improve your credit score? Keep reading to find out!
What is a Credit Builder Loan?
Also known as “Fresh Start Loans” or “Starting Over Loans,” a credit builder loan is designed for people looking to build their credit.
The money you borrow is kept in an account while you make payments. Once you’ve paid it off, the money is released to you. This allows the loan to be secure for the lender and keeps the interest rate low for you.
As you make payments on time every month, it’s reported to the three main credit reporting agencies (Experian, Equifax, and TransUnion).
Benefits of Getting a Credit Builder Loan
Here are some of the benefits you can reap if you get a credit builder loan:
No Need for Collateral
Most low-interest loans require you to put up something valuable for collateral, whether it’s your home, your car, or something else worth a great deal of money.
For some people, coming up with collateral can be difficult, but with a credit-building loan, you don’t have to worry about it.
Low Interest Rates
With lower risk to the lender come lower interest rates. That allows you to build your credit without having to spend an arm and a leg on interest.
Most credit builder loans have an interest rate of around 5%. Learn more about finding the best personal loans over here.
Low Monthly Payments
Building credit doesn’t have to force you to survive on ramen until it’s paid off. Instead, low monthly payments make it easy to rearrange your budget to be able to pay on time every month.
The biggest and most obvious benefit is that your timely payments are reported to the credit reporting agencies every month so you’ll end up with a higher credit score at the end of the loan.
Drawbacks to Credit-Building Loans
There are a couple of drawbacks to these loans that you need to consider:
No Immediate Access to the Money
If you want or need the money right away, this type of loan is not for you. Since the money is kept in a bank account while you make payments, you won’t be able to spend any of it until you pay it off.
Limited Borrowing Amount
Most of the time, a credit-building loan is small. In fact, many institutes don’t lend out more than $1500 for this type of loan. That can make it hard if you’re wanting to get more than that at the end of the loan.
Must Prove Income
To get a credit builder loan, you need to prove that you have income every month. Fortunately, this is really the only requirement, so as long as you can show you have a steady monthly income, you should be able to get this loan.
Find Out More
Now you know everything you need to know about how a credit builder loan can help you with your low credit score.
If you’re ready to get started with one of these loans, then check out our page on personal loans for bad credit. Soon, you’ll be on your way to having a higher credit score!