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What are Credit Builder Loans? Some Pros and Cons


While the COVID-19 crisis keeps making headlines across the globe, the finance sector is aiming both small businesses and consumers to keep an eye on their financial movements. Pandemic aside, it seems that having a bad credit score does not prevent anyone from applying for credit, as there are some circumstances in life that cannot be avoided. Therefore, there is a growing need for affordable lending that helps consumers to make the most of their credit ratings.

What is a credit builder loan?

Credit builder loans are not a type of loan “per se”, as they are a different kind of saving account, which helps you out to build upon credit history. Usually, they are offered by other financial institutions, such as community banks and credit unions. Their overall goal is to offer credit to some people that cannot afford any other kind of credit, for example, Low APR Guarantor Loans , which are ideal for those who need a second party to repay any debts.

Who can qualify for these loans?

In terms of who qualifies to apply for them, borrowers do not need a good credit score. Indeed, many lenders will consider people without any credit history at all. Interest rates are usually lower than other types of loans, and there is no need to pay for a security deposit. Credit builder loans are the perfect option for people with poor credit history (e.g. those who had problems with their credit in the past, being harder to get a loan/credit card).

What are the benefits of credit builder loans?

The top benefit of applying for a credit builder loan is that they are directly reported to credit bureaus institutions so that consumers can build their own credit history. This way, credit bureaus will asset you with a credit score rate, focusing on your payment history and some other factors. Have in mind that you do have to make sure that the correct information has been delivered to the credit bureaus (and that all the data is correct), as this process will directly impact on your credit score.

Some cons of applying for a credit builder loan

  • High APR. The APR, or Annual Percentage Rate is the number of fees that the lender charges you when borrowing the money. On certain occasions, it can be high, and overall, rates are pretty high.
  • Opening and closing fees. Your credit issuer might charge you with an opening fee when applying for a credit builder loan. It may also charge you if you have any late payments.
  • Watch out repayment terms. Be aware of the fact that the longer you keep paying for the credit, the more interests you will pay for.

Types of credit builder loans

There are different types of credit builder loans:

  1. Pure credit builder loans. Due to its characteristics, a pure credit builder loan is a savings account, where the lender places the entire credit loan. The money is then frozen until the borrower pays off the sum. The payment plan will depend on what you agree with the lender itself. This saving method might be useful for someone who is looking for a way to save money while improving credit rating.
  2. Share secured loans. In this occasion, shares secure loans use the saving account as a remnant of your loan payments. This is, the borrowers place the money in an account and this is held. When you pay off a quantity of money, you will have available the same quantity to spend. This could be a good fit for someone who is looking for a short-term saving strategy.

Credit builder loans vs. secured credit cards

Credit builder loans differ form secured credit cards in certain aspects. With a secured credit card, you have to make a deposit, which will be based on your credit limit. On a different note, every time that you pay with a secured credit card you are paying for interests while having monthly payments thought your credit builder loan you may even receive some money back from interests.

To sum up, a credit builder loan will be one of the best options for those who:

  • Do not much credit history.
  • Someone who does not want to use too many credit cards.
  • Those who are aiming to recover their finances from a crisis.
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