What’s a credit-builder loan and how does it work?

What’s a credit-builder loan and how does it work?
Written by Publishing Team

Our goal here at Credible Operations, Inc. , NMLS Number 1681276, referred to as “Credibility” below, is to provide you with the tools and confidence you need to improve your financial position. Although we promote products from our lender partners who compensate us for our services, all opinions are our own.

Are you considering using a credit building loan to build credit? Read about how it works, its pros and cons, and its alternative options. (stock struggle)

If you have a poor or poor credit history, you may have trouble qualifying for financial products, such as a mortgage or car loan, without a cosigner. And if you are approved, the lender is more likely to charge you a higher interest rate than anyone with a good credit history.

A credit building loan can be one way to improve your credit standing so that you can qualify for better rates and terms in the future. Good credit can make it easier to qualify for products like credit cards and personal loans.

Keep reading to learn more about credit building loans, how they work and some other options to consider if you’re working on your credit.

What is a building credit loan?

Credit building loan is a kind of personal loan Designed to help you create or rebuild credit. Unlike a standard personal loan, the lender does not issue you a lump sum of money up front, which you pay back with interest over time. Instead, the lender deposits the loan amount into a secured account and releases the money to you after you make the payments.

The lender reports your payments to the credit bureaus. So if you have no credit history or low credit score, Credit Builder Loan can do it Help you build credit – As long as you make the payments on time and as agreed. But the effect of a credit originator loan on your credit score varies.

For example, a 2020 Consumer Financial Protection Bureau study found that study participants without existing debt saw their credit scores rise 60 points more than participants with existing debt.

How does a building credit loan work?

If a credit originator loan is approved, the lender will deposit the loan amount into a locked savings account or certificate of deposit (CD) account. After that, you have to make monthly payments over the repayment period which usually lasts from six to 24 months. During the loan repayment, the lender informs the credit bureaus of your payment activity.

Although loan terms vary, the loan amount is usually deposited into your savings account in small increments after each payment is made or at the end of the repayment period, minus interest and fees.

Pros and Cons of Credit Building Loans

Like all financial products, the credit building loan has its advantages and disadvantages. Before applying for one, weigh the pros and cons.


  • Easier to qualify for a traditional personal loan – If you have minimal credit or poor credit, the lender may still agree to you.
  • Making payments on time may improve your balance – The lender reports your payment activity to the three major credit bureaus – Equifax, Experian, and TransUnion. If you pay off your loan as promised, it will add a positive payment history to credit reports, potentially raising your credit score.
  • It can help you build your savings – Once you pay off the loan, you will get your money back minus interest and fees. After that, you can deposit the money into a savings account or use it as you wish.


  • Benefits and fees – Similar to a traditional personal loan, you have to pay interest (and sometimes fees) when you take out a credit generator loan.
  • Making a late payment may lower your credit score If your monthly payment is more than 30 days past its due date, the lender can report it to the three major credit bureaus. As a result, it may lower your credit score, making it more difficult for you to qualify for future loans.
  • It can make it difficult for you to keep up with your current debt Taking out an additional loan means that you have to pay additional monthly installments (if you have an existing debt). As a result, you may find it difficult to stay on top of paying off your existing debts.

How much will a credit generator loan cost me?

The total costs will largely depend on the lender as interest rates, loan amounts offered and repayment terms vary. The higher the loan amount and interest rate, the higher the cost of your loan.

Some lenders also charge an upfront administration fee for loan processing.

To get a better idea of ​​how much a credit originator loan might cost you, look at the lender’s fee annual percentage rate (APR), a metric that takes into account interest, plus any fees.

How much can I borrow with a building credit loan?

Credit building loans are designed to help you establish a positive credit history, not necessarily to pay big expenses or make a purchase. While some personal loans can run into the tens of thousands of dollars, building credit loans are generally in relatively small amounts—a few hundred to a few thousand dollars.

It’s usually a good idea not to borrow more than you actually need. Since the goal of a credit builder loan is to establish a good payment history, the amount you borrow is not as important as making your payments on time, as agreed. A loan of $300 can be as beneficial as a loan of $1,000. But keep in mind that a lower loan amount means lower monthly payments.

In fact, depending on your interest rate and the amount you borrow, a credit generator loan can come with monthly repayment amounts under $100.

Where can I find a credit originator loan?

Multiple types of lenders offer credit building loans, including:

  • credit unions – Because credit unions are not-for-profit institutions, they often offer lower interest rates and better terms. But you will need to meet membership qualifications, join a credit union, to get a loan from one.
  • Banks – Most large banks do not offer loans to build credit, but some local and community banks may offer them.
  • Financial institutions for community development – These financial institutions focus on serving low-income people who have historically had fewer banking options.
  • Online Lenders – Online lenders typically offer digital application and approval processes for credit products. Because online lenders do not incur the expenses associated with physical locations, they often offer competitive rates and terms.

Before applying for a credit builder loan, remember to research the lender to make sure it is legitimate. This will reduce your chances of falling into a credit scam. And compare loans between several lenders to help ensure you get the best deal available to you.

Do you need to build credit? Alternatives to Building Credit Loans

If you want to improve your credit but don’t think a credit generator loan is right for you, consider the following alternative options:

  • Be an authorized user of someone else’s credit card – Do you have a family member who uses a credit card and has good credit? You can ask them to add you as an authorized user on the oldest credit card. If your credit card issuer reports secondary users to credit bureaus, this can help you build your credit.
  • secured credit card a secured credit card It is similar to a credit building loan in that it is also designed to help you build credit. Unlike a traditional credit card, with a secured credit card, the issuer requires a security deposit, which acts as security and helps set your credit limit. If you pay your credit card bill on time and the credit card issuer reports this information to the credit bureaus, it can help build a positive credit history.
  • Secured Personal Loan – You may find it easier to qualify for a secured personal loan if you have bad credit because it is less risky for the lender. This option requires you to pledge collateral — something of value that a lender can seize, such as a bank account or a car title deed — if you fail to repay the loan.
  • traditional credit card – If you have bad credit, you may also qualify for an unsecured credit card. With this option, you may experience a higher APR. To avoid interest, you can pay your credit card bill in full on or before the due date.

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