How to Get a Credit Builder Loan for Bad Credit

Having bad credit can make it difficult to get approved for loans and credit cards. Luckily, there are credit builder loans designed specifically for people with bad credit. These loans allow you to build your credit score over time by making on-time payments. In this comprehensive guide, we’ll explain everything you need to know about getting a credit builder loan with bad credit.

What is a Credit Builder Loan?

A credit builder loan works differently than a traditional loan. With a regular personal loan, you receive the loan amount upfront and make payments over time. But with a credit builder loan, the lender sets the loan amount aside in a bank account for you. You make monthly payments on the loan for a set period of time, usually around 2 years. The lender reports your on-time payments to the credit bureaus to help build your credit.

At the end of the loan term, you get access to the loan funds that were set aside, minus any interest and fees. Essentially, you are paying yourself back with interest while building your credit.

Credit builder loans typically range from $300 to $3000. Interest rates are usually around 15-20%.

Benefits of Credit Builder Loans

There are several advantages to using a credit builder loan when you have bad credit

• You can get approved even with bad credit or no credit history – Since the lender isn’t giving you money up front it’s low risk for them. Approval is based on your ability to make the monthly payments.

• Build your credit score – On-time payments are reported to the credit bureaus, helping add positive information to your credit reports. This can bump up your credit score over time.

• Establish credit history – If you have no credit history, a credit builder loan can help establish your first line of credit. Credit mix and length of credit history make up a portion of your FICO score.

• Save money – The funds set aside by the lender act as a forced savings account. At the end of the loan term, you get the money to put towards anything you want.

Requirements for Bad Credit Credit Builder Loans

Here are some common eligibility requirements for credit builder loans for bad credit borrowers:

• Minimum credit score – Most lenders don’t have a minimum credit score requirement. But your credit score does impact the interest rate you’ll pay. The lower your score, the higher the rate.

• Income – Lenders want to see you have enough steady income to make the monthly payments. Requirements vary by lender but can range from $800 – $2000 per month.

• Age – You typically need to be at least 18 years old. Some lenders require you to be a U.S. citizen or permanent resident.

• Fees – There is often an origination fee of around 1-5% of the loan amount. You may also pay late fees if you miss a payment.

As long as you meet these basic requirements, you should be able to find a lender willing to approve you for a credit builder loan despite having bad credit.

How to Apply for a Credit Builder Loan

Applying for a credit builder loan is quick and easy, especially compared to traditional loans. Here are the steps:

1. Compare offers – Look at credit builder loans from online lenders, credit unions, and banks. Compare interest rates, fees, loan amounts, and terms.

2. Check eligibility – Make sure you meet the lender’s minimum requirements like income level.

3. Complete application – Apply online by providing personal and financial information. Different lenders ask for different details.

4. Get approved – Approval often only takes a few minutes or hours. Some lenders may take 1-2 days.

5. Sign loan agreement – Review and electronically sign the loan contract. This outlines the loan amount, fees, interest rate, term length, and payment schedule.

6. Make payments – Once approved, you’ll begin making monthly payments until the loan is paid off. The lender reports payments to help build your credit.

7. Get your money – After you pay off the loan, you’ll receive the loan amount minus any interest and fees.

It’s really that simple to get approved for a credit builder loan online. The whole process may only take a few days from application to getting approved.

Where to Get Credit Builder Loans for Bad Credit

Now that you know how they work, here are some top places to get credit builder loans with bad credit:

Online Lenders

• Upstart – Loans up to $10,000, APR from 7.46% to 35.99%, 3 and 5 year terms
• LendingPoint – Loans up to $36,500, fixed APR from 15.49% to 35.99%, 3 year term
• Upgrade – Loans up to $15,000, fixed APR from 5.94% to 35.97%, 3 and 5 year terms

Online lenders like these offer fast approvals and funding for credit builder loans. Interest rates may be higher than other options though.

Credit Unions

• Alliant Credit Union – Loans up to $5,000, APR from 7.99% to 17.99%, 1 to 5 year terms
• Suncoast Credit Union – Loans up to $2,000, APR from 10.75% to 18%, 2 year term
• Self-Help Federal Credit Union – Loans up to $3,000, APR from 8.99% to 15.99%, 1 to 2 year terms

Credit unions are non-profit and tend to offer lower interest rates. However, you need to become a member first by opening a savings account and maintaining a minimum balance.

Banks

• Wells Fargo – Loans up to $3,000, APR from 15.24% to 21%, 2 year term
• US Bank – Loans up to $1,000, APR from 12.99% to 20.99%, 2 year term
• Chime – Loans up to $200, no interest, 1 year term

Traditional banks have gotten into offering credit builder loans in recent years. Interest rates and loan amounts tend to be lower than other options. Some banks like Chime even offer credit builder loans with no interest.

Peer-to-Peer Lending

• Lending Club – Loans up to $40,000, APR from 5.99% to 35.89%, 3 or 5 year term
• Prosper – Loans up to $40,000, APR from 6.95% to 35.99%, 3 or 5 year term

P2P lending platforms connect individual investors looking to lend money with borrowers. Interest rates can be competitive but loan approval isn’t guaranteed.

Tips for Choosing the Best Loan

• Compare APR and fees from multiple lenders
• Make sure you can afford the monthly payment
• Look for soft credit checks that won’t hurt your score
• Check there are no prepayment penalties
• Read reviews and complaints about the lender
• Confirm the lender reports to all 3 credit bureaus

Prioritize finding an affordable payment on a loan from a reputable lender that will responsibly help build your credit history.

What to Do After Getting a Credit Builder Loan

Once you’re approved for a credit builder loan, make sure you take advantage of the opportunity to boost your credit score. Here are some tips:

• Set up autopay so you never miss a payment
• Avoid applying for more credit during the loan term
• Check your credit reports regularly to ensure on-time payments are being reported
• Keep credit card balances low to reduce your credit utilization
• Contact the lender right away if you’ll be late on a payment to avoid fees
• Have a plan to pay off any other debts so you can improve your credit faster
• Use the money you get back responsibly – pay off bills, build an emergency fund

Sticking to on-time payments is key. Within 6 months or so, you should start to see your credit score improving as long as no new negative information gets added to your credit reports.

Alternatives to Credit Builder Loans

If you decide a credit builder loan isn’t right for you, here are a couple alternatives to consider:

• Secured credit cards – These require a refundable security deposit that becomes your credit limit. They allow you to build credit with lower risk to the issuer.

• Become an authorized user – You can piggyback off someone else’s good credit. Make sure they have a long history of on-time payments and low balances.

• Credit-building apps – Apps like Self, Slice, and Petal report on-time subscription payments to credit bureaus to help build your score.

• DIY loans – You can create your own credit builder loan by setting aside money in a CD and making monthly payments to yourself. But make sure payments are reported to credit bureaus.

• Debt snowball method – Focus on paying off your debts from smallest to largest. As you pay down and close accounts,