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What’s a Credit-Builder Loan? (And Why To Get One)

A credit-builder loan can help you strengthen or establish your credit, if you can wait to access the funds.

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By Melanie Lockert

Written by

Melanie Lockert

Writer

Melanie Lockert is a freelance writer and the founder of the blog and author of the book, “Dear Debt.” Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Allure, Business Insider, Credit Karma, Fortune, and more.

Edited by Meredith Mangan

Written by

Meredith Mangan

Senior Editor

Meredith Mangan is Credible's Senior Editor for Personal Loans. Since 2011, she’s helped steer content creation in the areas of mortgages and loans, insurance, credit cards, and investing for major finance verticals, including Investopedia, Money Crashers, and The Balance.

Updated February 28, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances.

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Credible Takeaways

  • Credit-builder loans are intended to help establish or improve credit.
  • Unlike traditional loans, you don't have access to the funds until after you make all of the payments.
  • There are other financial tools that could also improve your credit, such as becoming an authorized user on a credit card and getting a secured loan.

Having zero credit history or bad credit can make getting approved for a loan difficult, whether it’s a personal loan, mortgage, or auto loan. Making regular, on-time debt payments can improve your score, but if you don’t have and aren’t eligible for a loan or credit card to make payments on, it can be hard to make progress.

This is where a credit-builder loan can come in handy. These are designed to help borrowers with no credit or bad credit improve their credit history and score, though the funding process looks very different compared to a traditional loan.

What is a credit-builder loan?

A credit-builder loan is an unconventional type of loan offered by some lenders to help you build up your credit and possibly save. They’re relatively small loans, such as $1000, and the loan amount doesn’t go directly to you when you take out the loan. Instead, it’s put into a locked account that you can’t access until you’ve made all of your monthly payments. In other words, you get the loan amount at the end of repayment, not the beginning.

Like other loan types, credit builder loans have an annual percentage rate (APR). The APR accounts for the loan’s interest rate plus any upfront fees, and indicates how much the loan costs. A lower APR means less cost.

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Important

A credit-builder loan isn’t a savings account, it’s a loan. As such, it’s important to compare APRs between credit-builder loans to find the best option available to you.

The payments you make are reported to at least one (but ideally all three) of the major credit bureaus — Experian, Equifax, and TransUnion. If you make all your payments on time, this can help you establish a positive credit history and possibly raise your score.

How does a credit-builder loan work?

With a credit-builder loan, the lender puts your loan amount into a savings account or certificate of deposit (CD). To access the funds, you repay the loan in full over a series of monthly payments.

Credit-builder loan amounts are modest — $500 to $3,000, depending on the lender — and repayment terms are usually short, between six and 24 months.

Check Out: Types of $500 Loans

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Good to know

After you’ve made all of your payments during the repayment period, you’ll then receive access to your loan funds.

Annual percentage rates (APRs) may range from around 5% to 16% or more, depending on the lender. Since credit-builder loans are geared toward those with limited or poor credit, lenders typically don’t have minimum credit score requirements and may not require a credit check.

How to get a credit-builder loan

You can get a credit-builder loan with an online lender, credit union, or bank that offers this type of lending product. It’s worth noting that not all financial institutions offer credit-builder loans. For instance, many large banks do not offer credit-builder loans. When looking for credit-builder loans, make sure you’re working with a reputable lender and be wary of personal loan scams.

To get a credit build loan, follow these steps.

  1. Compare options: Look at multiple options from different lenders and review the repayment terms, APRs, and fees side-by-side. You may be able to see if you prequalify with some lenders. Once you’ve done your research and compared rates and fees, you can choose the best option for your needs and budget.
  2. Apply for a credit-builder loan: Provide your personal information, like name and date of birth, plus employment and income information, then submit your application online with your preferred lender. Unlike traditional loans, some credit-builder loan lenders don’t require a credit check or conduct a hard pull when you apply. If there is a hard inquiry, your credit score may be impacted and temporarily lead to a slightly lower score.
  3. Make on-time payments: After being approved for a credit-builder loan, your lender will deposit your loan amount into a locked savings vehicle. To build credit, you’ll pay off that amount for the specified term. This establishes a positive repayment history with the credit bureaus.
  4. Get your money: Once the repayment term is up, you can access the loan amount.

Should I get a credit-builder loan?

If you have yet to establish a credit score and have tried other alternatives, a credit-builder loan may be a good option. A credit-builder loan is one way to add an installment loan to your credit history. On-time payments can build your credit over six months or so.

Before moving forward, make sure you can easily fit the monthly payments in your budget and review potential interest rates and fees.

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Using a personal loan to build credit

Personal loans can be an alternative to credit-builder loans. Some lenders offer personal loans to borrowers who have no credit history or have bad credit.

Getting a personal loan from one of these lenders means you get the loan amount upfront, which is then repaid in fixed monthly installments.

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Tip

Keeping your credit utilization low, ideally below 30%, and making on-time payments can help you build credit.

Additionally, you might consider a secured personal loan or adding a cosigner if approval is difficult.

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Secured loans

Secured personal loans require that you put down collateral (something that has value), which the lender can seize if you default on the loan.

By having something to back the loan, the lenders reduce their risk of lending to you. Often, the APR on secured personal loans is less than on unsecured loans because of the collateral, but not all lenders offer them.

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Be aware

Your collateral can be taken by the lender, as a way to recuperate its loss, if you stop making payments on a secured personal loan.

Loans with a cosigner

Cosigners can help with approval, but there are some important points to consider. First, the cosigner should have excellent credit and a good income to help you qualify for the loan. (A cosigner is often a spouse, close family member, or close friend.) Secondly, the cosigner is also held responsible for the loan. In other words, if you don’t make the required payments, it can affect your cosigner’s credit and they’ll be responsible for payments toward the loan.

Note that not all lenders offer personal loans with cosigners.

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Other ways to build credit

Credit-builder loans can be a useful tool for consumers with no credit score or history. They may also help if you have bad credit and want to show that you’re a responsible borrower. But there are other ways to build credit that can be used along with or instead of a credit-builder loan.

  • Become an authorized user: One way to easily build credit is to become an authorized user on someone else’s credit card. As an authorized user, you’ll get access to their credit line, but the primary cardholder is responsible for payments. This can be a great way to establish a credit history. Just make sure to discuss spending with the primary cardholder and also ensure they make payments on time so you can reap the benefits.
  • Get a secured credit card: If you have no credit history or have poor credit, lenders may be wary of approving you as a borrower. A secured credit card helps solve that problem. You provide funds of $50 to $300, depending on the card, which is your upfront deposit. That amount typically serves as your credit limit. You can use the card from there and rebuild credit through timely monthly payments.
  • Get a retail credit card: If you have a favorite retail store or gas station, you may qualify for a retail credit card. Typically, these cards don’t have strict eligibility requirements but, as a result, may have higher rates. Unfortunately, they typically come with low credit limits as well.
  • Keep credit card balances low: This is important to note, as credit utilization is an important factor affecting your credit score. It’s best to keep your overall balance below 30% of your limit. If you do that and make on-time payments, you will likely improve your credit score.
  • Make payments on time: If you have any loans or credit cards, it’s crucial to make on-time payments. This is the single most important factor in your FICO score (it contributes 35%). Timely payments will give the biggest boost to your score over time, while a history of late and missed payments will hurt it.

Tip: If you have high-interest credit card debt, try qualifying for a debt consolidation loan to lower your rate once you’ve improved your score.

Credit-builder loan FAQ

Where can I get a credit-builder loan?

You can apply for a credit-builder loan through local credit unions, banks, and online lenders that offer them. Before accepting the loan, review terms and conditions, fees, and rates, and ensure that you can comfortably afford the monthly payment throughout the term. Also, confirm that the loan is reported to all three credit reporting agencies.

Learn More: Where Can I Get a Personal Loan?

Do personal loans build credit?

Personal loans can help you build credit if you make all of your payments on time and the lender reports to the credit bureaus. Payment history carries the most weight when it comes to your FICO score, so to build credit with a personal loan, monthly payments must be submitted by the due date. If you miss payments, it can harm your credit.

How long does it take to build credit?

It can take up to six months to build credit, whether you’re starting from scratch or hoping to improve your score. Your payment history has a major influence on your credit score, so having a solid record of payments over at least six months can help build credit.

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Meet the expert:
Melanie Lockert

Melanie Lockert is a freelance writer and the founder of the blog and author of the book, “Dear Debt.” Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Allure, Business Insider, Credit Karma, Fortune, and more.