There are many reasons why you may not have credit. You could be young and just starting out. An immigrant who is new to our financial system. Or perhaps you’ve operated on cash and haven’t participated in the credit system to date. Whatever the reason, we have a way to help you slowly and securely build your credit score over time.
Having bad credit can make it difficult to get approved for loans and credit cards, This is because lenders view borrowers with low credit scores as high-risk One way to build your credit when you have bad credit is through a credit builder loan
In this comprehensive guide, I will explain what credit builder loans are, why they can be useful for bad credit borrowers, and provide tips for getting approved. I will also recommend the top 7 credit builder loans for bad credit based on interest rates, fees, loan amounts, and availability.
What is a Credit Builder Loan?
A credit builder loan is a type of installment loan designed specifically for people with bad credit or no credit history. Unlike regular installment loans, the lender places the full loan amount into a locked savings account. You make monthly payments on the loan as with any other loan. The key difference is you cannot access the money in the savings account until the loan is paid off.
As you make on-time payments, the lender reports your payment activity to the three major credit bureaus – Experian, Equifax and TransUnion. This helps you build your credit history and improve your credit scores over the 12 to 24 month loan term. Once you pay off the entire loan balance, you can access the money in the locked savings account.
Credit builder loans typically have low loan amounts ranging from $300 to $1000 and reasonable interest rates since the lender faces less risk.
Benefits of Credit Builder Loans for Bad Credit
Here are some of the main benefits of using a credit builder loan when you have bad credit:
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Get approved with bad credit – Most credit builder lenders do not check your credit or have minimal credit requirements. Some may do a soft credit inquiry which does not negatively impact your score.
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Build credit history – On-time monthly payments are reported to the credit bureaus to help establish credit history, This can significantly improve your credit scores over the loan term
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Access savings – The loan funds sit in a savings account that you can unlock and withdraw once the loan is fully paid off. It forces disciplined savings.
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Lower interest rates – Compared to alternatives like payday loans or bad credit loans, credit builder loans tend to have much lower interest rates.
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Available nationwide – Many credit builder lenders operate online and offer loans in most or all states. Availability is not an issue.
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Flexible terms – Loan terms range from 12 months to 24 months typically. You can choose a term that aligns with your budget.
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No prepayment penalties – Most lenders allow you to pay off the loan early with no penalties. You can unlock the savings once the balance is paid off.
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May offer other services – Some credit builder lenders provide additional services like financial education, credit monitoring, and access to secured credit cards.
Tips for Getting Approved for a Credit Builder Loan with Bad Credit
When applying for a credit builder loan with bad credit, follow these tips to strengthen your approval odds:
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Check loan requirements – Make sure you meet eligibility criteria such as age, income, and residency requirements.
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Provide income documentation – Have paystubs or bank statements handy to verify your income if required.
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Start with lower loan amounts – Ask for a smaller loan amount first as lenders may grant smaller loans more readily. You can request larger loans later once you establish a payment history.
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Setup autopay – Enrolling in autopay from your bank account demonstrates you can manage monthly payments.
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Apply with several lenders – If denied by one lender, try others as approval criteria varies. Pre-qualify to check rates without a hard credit check.
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Consider adding a cosigner – Adding a cosigner with good credit may increase the chances of approval and lower the interest rate.
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Improve your credit first – If you are repeatedly denied, take steps to improve your credit before reapplying such as lowering credit utilization or disputing errors.
Top 7 Credit Builder Loans for Bad Credit in 2023
Based on interest rates, fees, loan amounts, availability, and customer reviews, here are my top picks for the best credit builder loans for bad credit:
1. Credit Strong
Credit Strong offers three credit builder loan options ranging from $525 to $1550 over 12 or 24 month terms. Interest rates range from 5.99% to 15.96% APR which is at the lower end for bad credit borrowers. Credit Strong is available online in 48 states and offers free credit monitoring. They also provide access to the Credit Strong Secured Credit Card once your credit builder loan is paid off.
Loan amounts: $525 – $1550
APR: 5.99% – 15.96%
Loan terms: 12 or 24 months
Availability: 48 states
2. Self Financial
With Self Financial, you can choose loan amounts from $525 up to $3000 with terms from 12 to 24 months. Interest rates start as low as 7.99% APR. Making monthly payments on time can help you qualify for an unsecured Self Visa Credit Card. Self allows early payoff without penalties and is available nationwide.
Loan amounts: $525 – $3000
APR: 7.99% – 15.24%
Loan terms: 12 to 24 months
Availability: Nationwide
3. Upgrade
Upgrade offers credit builder loans from $500 up to $5000. Loan terms range from 24 to 60 months so you can choose a longer repayment term if needed. Interest rates start at 6.99% APR which is very competitive. Upgrade reports to all three credit bureaus and is available online in every state.
Loan amounts: $500 – $5000
APR: 6.99% – 35.97%
Loan terms: 24 to 60 months
Availability: Nationwide
4. LoanUp
With LoanUp, you can borrow between $600 and $3600 over terms from 8 to 36 months. Interest rates start at 11.78% APR. LoanUp allows joint applications and has few borrowing requirements ideal for bad credit. Payments are reported to Equifax and Experian. LoanUp operates online and offers credit builder loans in 32 states currently.
Loan amounts: $600 – $3600
APR: 11.78% – 26.47%
Loan terms: 8 to 36 months
Availability: 32 states
5. Credit Karma Money
Credit Karma Money offers installment loans up to $5000 for bad credit borrowers with terms from 24 to 60 months. Installment loans can help build credit when payments are reported to the credit bureaus. Interest rates start at 6.99% APR and there are no origination fees. Credit Karma Money operates online in over 40 states.
Loan amounts: Up to $5000
APR: 6.99% – 35.99%
Loan terms: 24 to 60 months
Availability: Over 40 states
6. Avant
Avant personal loans up to $6000 can be used to build credit. While not specifically marketed as a credit builder loan, on-time payments help strengthen your credit profile. Loan terms range from 24 to 60 months. Interest rates start higher at 9.95% APR due to worse credit profiles. Avant operates online in over 40 states.
Loan amounts: Up to $6000
APR: 9.95% – 35.99%
Loan terms: 24 to 60 months
Availability: Over 40 states
7. OneMain Financial
OneMain Financial offers larger personal loans up to $20,000 even with bad credit. The unsecured personal loans are not specifically credit builder loans but can positively impact your credit through on-time repayment. Loan terms range from 24 to 60 months. Interest rates start at 18% APR due to the high credit risk. OneMain Financial has over 1,500 branches nationwide.
Loan amounts: Up to $20,000
APR: 18% – 35.99%
Loan terms: 24 to 60 months
Availability: Nationwide
Alternatives to Credit Builder Loans
If you are not able to qualify for a credit builder loan due to severely damaged credit, there are a few alternatives to explore:
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Become an authorized user – Ask a family member or friend with good credit to add you as an authorized user to their credit card. Their on-time payments will be added to your credit file.
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Secured credit cards – Secured cards require a refundable security deposit that becomes your credit limit. It demonstrates you can handle monthly payments.
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Retail credit cards – Department store cards from retailers like Macy’s or BestBuy are easier to qualify for and can help build credit history.
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Subprime credit cards – Issuers like First Access provide credit cards to people with bad credit to help rebuild your profile.
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Student loans – Federal student loans don’t require credit checks. Managing payments can build positive payment history.
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Secure savings loans – Some banks offer loans backed by savings you set aside. Payments are reporte
Struggling to manage your debt?
Check out our “Manage Your Debt and Finances” guide for helpful tips about how to manage, consolidate and pay off debt, create a budget, and more.
Second Chance Credit Rebuilder
For DC Credit Union members with low credit scores, we offer a loan to help you raise your credit score over time.
We won’t deny you because of your low credit score, but you must be a member in good standing with a checking account and a funding source. We also require that you’ve previously borrowed from DC Credit Union and paid on time.
The Second Chance Credit Rebuilder process works like this:
- We issue you an unsecured loan or credit card with a limit up to $2,500.
- Get coaching from us on how to use credit wisely
- Make your loan payments on time
- We slowly step up your loan or credit card limit, growing your borrowing capacity along with your credit score.
- Once your score has gone above 550, you are a candidate for traditional loans and financing.
Five ways to improve your credit score:
- Pay all of your bills on time every month
- Keep balances low on credit cards, well below the credit limit
- Only open new credit accounts as needed, and don’t open a lot of new accounts too quickly
- If you’ve missed payments, get current and stay current
- If you can’t make payments, contact your creditors to work out a payment plan
Secret $8,000 Line of Credit For EVERYONE with Bad Credit | No Hard Inquiry EVER!
FAQ
What credit score do I need for a credit builder loan?
Can you be denied for a credit builder loan?
Can I borrow money with terrible credit?
How does credit builder work?
Money added to Credit Builder is held in a secured account as collateral for your Credit Builder Visa card, which means you can spend up to this amount on your card. This is money you can use to pay off your charges at the end of every month. * Not available in Alabama, Indiana, Kentucky, Nevada, Vermont, Washington, or Wisconsin.
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.
Should you apply for a Credit-Builder loan?
If you’re interested in applying for a credit-builder loan, here are five to consider. Why Self stands out: Self credit-builder loans may be a good option for people with lower credit scores. Credit-builder repayment plans start at $25 per month. And you can apply for a Self credit-builder loan without a hard inquiry on your credit.
How do I choose a Credit Builder loan?
When comparing credit-builder loan lenders pay special attention to the following: Loan amounts: Credit-builder loans tend to be for smaller amounts — usually between $300 and $3,000. Make sure to check the loan amounts offered by each lender to select the one that best fits your budget and needs.