|WHAT IS A CREDIT-BUILDER LOAN?|
|Posted on: Aug. 25, 2017 in Credit, Credit Score|
Having poor credit or no credit can make life difficult. You might have trouble getting a credit card and, if you do get one, you may have a very high interest rate. The same goes for other kinds of loans like auto loans and mortgages. Potential employers and landlords also will often pull your credit report and use the information it contains to decide whether to offer you a job or an apartment.
While it may seem unlikely, there are some ways you can use credit to build credit. One such way is through credit-builder loans. These loans are usually offered by smaller financial institutions like your local community bank or a credit union. You may also hear this type of loan referred to as a “fresh start” or a “starting over” loan, because that is exactly what they are designed to do.
Here’s how they work:
Once you’ve been approved, the lender will deposit money into a savings account until you repay the loan. Remember, you’re borrowing to build up your credit history, not because you need the money. Then, once you’ve repaid the full amount, you’ll have access to the money. You can look at this as paying the loan off in advance or simply putting some money into savings for yourself.
Why would anyone offer this? The answer is two-fold. First, if you do business with a bank or credit union, you’re more likely to stay a customer. It’s also low-risk for them. If you default, they’ll take the money out of the account. They don’t lose. But if you pay it all back and raise your score, when it comes time to borrow again in a more traditional way, they can make money on that loan.
However, it’s important to keep in mind that you must make all payments on time. You’re doing this so that the lender can report your activity to the credit bureaus. That means they’ll report timely payments that can help your score, but if you miss a payment they’ll report that, too. Missed payments will only bring your score even lower.
Are credit-builder loans worth it? They can be! Another way to build credit is through a bad credit auto loan. If you’re ready for a new car but your credit is keeping you from getting approved, CreditYes can help with our bad credit auto loan program! We can match you with a dealership in your area that will be with you every step of the way. Our service is fast and free. Fill out our secure online application and get behind the wheel of your next car today!