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To build credit, you need credit, which can make it a frustrating task for those just starting out or trying to add a mix of credit types to their financial profile. Lenders are typically less likely to approve someone if they have low credit scores or don’t have a thick credit file. If you find yourself in this position, a credit-builder loan might be worth considering.
A credit-builder loan is designed to help people who have little or no credit history build credit. Thats why credit-builder loans go by other names like “Fresh Start Loans” or “Starting Over Loans.” Growing your score has lots of benefits, like making approval for credit cards and loans, and at better rates, more likely.
Credit-builder loans do not require good credit for approval. However, they do require that you have enough income to make payments. When applying, you might need to provide information on your employment history, income and balance in your checking or savings account.
Building or rebuilding your credit can be a challenging process One of the best ways to establish or improve your credit score is with a credit builder loan. These loans are designed specifically for people with limited credit history or low credit scores
In this comprehensive guide I will explain what credit builder loans are who they are best suited for, and provide a list of the top 7 credit builder loans of 2023 based on interest rates, fees, loan amounts, and other key factors.
What is a Credit Builder Loan?
A credit builder loan is a unique type of installment loan intended to help consumers establish or rebuild credit. Here’s how it works:
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You apply for and are approved for a set loan amount based on your income and expenses. This loan amount acts as your “credit limit”.
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The lender places the loan amount into a locked savings account. You make monthly payments on the loan but cannot access the money in the account.
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The lender reports your on-time monthly payments to the three major credit bureaus. This helps build your credit history.
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Once you pay off the loan, you get access to the money that has accumulated in the locked savings account. Essentially you are building your own money while building credit.
The key benefit of credit builder loans is the ability to demonstrate responsible use of credit to lenders without posing any risk to the lender. It’s a win-win scenario.
Who Are Credit Builder Loans Best For?
Credit builder loans are ideal for:
- People with no credit history
- People with limited credit history
- Those rebuilding or establishing credit after financial setbacks
- Recent immigrants with no U.S. credit history
They provide an opportunity to build credit with responsible use of a loan. Having on-time payments reported to credit bureaus can quickly improve thin credit files and boost credit scores.
7 Best Credit Builder Loans of 2023
Based on interest rates, fees, loan amounts, and other features, here are my picks for the top credit builder loans:
1. Self Credit Builder Loan
- Loan amounts: $525 – $3,024
- Term: 24 months
- APR: 15.49% – 15.99%
- Origination fee: $9.00 – $72.00
Pros
- Available in all 50 states
- Low minimum monthly payments
- No prepayment penalty
Cons
- Credit pull required
- High APR
Self offers an easy online application process and access to funds after completing just 6 monthly payments. It’s a simple, flexible option.
2. Credit Strong Credit Builder Account
- Loan amounts: $200 – $1,000
- Term: 6 – 24 months
- APR: Not disclosed
- Origination fee: None
Pros
- Cash rewards program
- No credit check required
- Option for early payoff
Cons
- Rates not disclosed upfront
- Upper income limits
I like Credit Strong for the cashback rewards and no hard credit check. You can get approved with just an ID and proof of income.
3. MoneyLion Credit Builder Plus
- Loan amounts: $300 – $1,000
- Term: 12 months
- APR: 5.99% – 29.99%
- Fee: $19.99 monthly membership
Pros
- Get part of the funds upfront
- Low rates available
- Mobile app and other services
Cons
- Requires membership fee
- Max 12 month term
MoneyLion is unique in providing immediate access to some of the approved loan amount. The membership also includes financial tracking tools.
4. Credit Karma Money Credit Builder
- Loan amount: $500 total
- Term: Flexible based on $10+ weekly deposits
- APR: None
- Fee: None
Pros
- Pay at your own pace
- Build savings and credit
- No interest or fees
Cons
- Must open Credit Karma Money account
- Max loan amount $500
I love the flexibility and no-fee structure of Credit Karma’s program. You control the pace and build savings along the way.
5. securities
- Loan amounts: $300 – $5,000
- Terms: 6 – 24 months
- APR: 5.99% – 29.99%
- Fee: None
Pros
- Online application and access
- No origination fee
- Autopay discount available
Cons
- Membership eligibility rules
- Maximum repayment term 24 months
Alliant offers competitive rates and a streamlined application process. Autopay discount saves you 0.25% on APR.
6. Avant Credit Builder Loan
- Loan amounts: $500 – $1,000
- Term: 24 months
- APR: 9.95%
- Fee: $120 administration fee
Pros
- Established online lender
- Lower rate than many competitors
- Simple eligibility requirements
Cons
- High origination fee
- Relatively low max loan amount
I like Avant for the low APR and simple application with fast funding. Just be aware of the hefty admin fee.
7. Grow Credit Modern Loan
- Loan amounts: $500 – $5,000
- Terms: 24 months
- APR: 7.99% – 29.99%
- Fee: None
Pros
- No origination fee
- Option to build credit without interest
- Discounts for autopay
Cons
- Membership account required
- Requires credit check
Grow Credit offers a simple application process and one of the lowest APR ranges available. Discount of 0.25% for autopay.
What To Look For in a Credit Builder Loan
When comparing credit builder loan options, keep these factors in mind:
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Interest rates and fees: Lower rates and fees mean less cost over the loan repayment period.
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Loan amounts: Loan limits from $300 up to several thousand dollars. Optimal amount depends on your budget.
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Term length: Longer terms make payments more affordable but increase interest costs. Typical terms are 12 to 24 months.
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Eligibility: Each lender has its own eligibility standards. Some require a credit check while others only review income/identity.
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Perks: Extras like cashback rewards, account management tools, and credit monitoring services add value.
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Access to funds: With some lenders, you can access a portion of the funds immediately or early in the term.
Finding the right loan depends on your financial situation. Compare costs, loan amounts, and lender requirements to choose the best credit builder loan for you.
How to Get the Most From Your Credit Builder Loan
Here are my top tips to maximize the benefits of your credit builder loan:
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Make payments on time every month without fail. Set up autopay if it helps you remember.
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Pay more than the minimum when possible to pay off the balance faster.
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Limit new credit applications during the loan term as too many can lower scores temporarily.
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Review your credit reports before applying to correct any errors that could negatively impact approval.
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Consider adding a responsible user to the account to help boost their credit as well.
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Be sure to retrieve the money from your savings account after successfully repaying the loan.
Responsible use of a credit builder loan can quickly add positive payment history and improve your credit standing with lenders. Follow these steps and you’ll be on the path to better access to financing and lower rates.
The Bottom Line
Credit builder loans offer a unique way to build or rebuild your credit history through on-time installment loan payments reported to the credit bureaus. They provide affordable loan options even if you have limited credit or past financial challenges.
Based on the criteria most important for credit building, I recommend Self, Credit Strong, MoneyLion, Credit Karma Money, Alliant, Avant and Grow Credit as the top credit builder loan picks for 2023. Evaluate their terms and eligibility criteria to select the best loan for your situation. Use the loan responsibly by making monthly payments on time and in full.
With a credit builder loan, you can demonstrate responsible credit management – the key factor lenders evaluate when making decisions. A successful credit builder loan will quickly boost your credit scores and set you up for approvals on auto loans, personal loans, credit cards and other financing you need to reach your financial goals.
Who benefits the most from credit-builder loans?
There are two groups of people who might want to consider a credit-builder loan:
How does a credit-builder loan work?
With a traditional loan, the borrower gets the money first and pays it back over time. With a credit-builder loan, the lender keeps the total loan amount while the borrower makes payments. Once all the payments have been made, the borrower receives the full loan amount. Holding the money in a secured account until the loan is fully repaid acts as a safety net for the lender that’s taking on risk if you have no experience with credit or low credit scores.
During the loan terms, your on-time payments are reported to at least one major credit bureau, but you should look for loans that report to all three (Equifax, Experian and TransUnion) if possible. Since FICO and VantageScore pay the most attention to your payment history when compiling scores, its crucial to make your payments on time. Having your on-time payments reported helps build your credit and shows you can handle a credit account.
Another benefit of a credit-builder loan? At the end of the loans terms, youll have a reserve of funds that can serve as an emergency fund or go toward another important savings goal.
The Ultimate Guide to Credit-Builder Loans in 2024!
FAQ
Is a credit builder loan a good idea?
What is the best credit builder?
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Loan
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APR Range
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Loan Terms
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Credit Karma Best for No Interest Charged
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N/A
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No fixed loan term
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Credit Strong Best for Long Repayment Terms
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6.99%–15.61%
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2–5 years
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Digital Federal Credit Union Best Credit Union
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5.0%
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1–2 years
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MoneyLion Best for Small Loan Amounts
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5.99%–29.99%
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1 year
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How much can I borrow with a credit builder loan?
What credit score do you need to get a $30,000 loan?
Which Credit-Builder loan product is best?
Our best overall pick delivers the best value on the path to building good credit, in our view. CreditStrong is the best credit-builder loan product on the market right now. Key selling points include its unusually high borrowing limits and wide variety of loan and credit line structures for maximum flexibility.
What is the best online lender for a Credit Builder loan?
Why It Has Some of the Best Credit-Builder Loans: Self (formerly Self Lender) is the best online lender for a credit-builder loan because it offers loans with payments as low as $25 per month for 24 months. Self credit-builder loans are also available to people in all 50 states.
Where can I get a Credit Builder loan?
Some offers may come from WalletHub’s advertising partners. The best credit-builder loans come from Republic Bank, which puts the funds for your credit-builder loan into an interest-bearing account. This helps reduce the overall cost of your loan since you’re earning money at the same time.
Is a Credit Builder loan a good idea?
A credit-builder loan is a good idea because you can easily improve your credit score by making on-time monthly payments. With a credit-builder loan, the lender will put money into a savings account for you, and you’ll make payments to them over a set time.
What is a Credit Builder loan?
A credit-builder loan is an installment loan with fixed monthly payments for someone who wants to rebuild or establish their credit. When you take out a credit-builder loan, the lender puts money into a savings account for you, and you then repay that amount plus interest before receiving the savings account at the end.
What Credit Builder loan options does credit strong offer?
Credit Strong features four different credit builder loan options, including installment loan accounts and a revolving line of credit. With the installment loan accounts — Instal and CS Max — the loan proceeds are locked into a savings account from 24 to 60 months. Payments can be as low as $28, depending on the term and amount you want to save.