Whether you want to get a car loan or purchase a home, you need an excellent credit score to achieve favorable results. Most lending and financial institutions consider credit score as a determining factor whether you’re approved for a loan or obtain flexible interest rates. That’s why if you have a poor credit score, you may be unable to secure the financial services you need. This is where credit builder loans enter into the picture.
If you haven’t heard about credit builder loans, you may be wondering if applying for them can do more good than harm to your financial health.
Keep reading this article to learn whether credit builder loans can work for you and your needs.
What Are Credit Builder Loans?
Essentially, credit builder loans refer to a type of installment loan intended to build credit history. It’s different from traditional personal loans because the borrower can’t get the money upfront. Instead, the lender will deposit the money in a savings account they can’t access until the entire loan payment is made.
With credit builder loans, the borrower will repay the loan over time, with the corresponding interests. After repaying the loan in full, the lender gives the money, including the interest earned. Depending on the situation, they may refund the borrower’s interest payments throughout the loan term. Once it’s done, the lender will report their payment history to the major credit bureaus. As a result, they may improve credit scores by 70 points on average.
What Are The Pros And Cons Of Credit Builder Loans?
Now that you know how credit builder loans work, it’s time to figure out whether they can benefit your circumstances. You can do this by understanding the pros and cons of these loans. Doing so can help you decide whether taking out credit builder loans can be the best thing to do.
Just like other types of financial services, credit builder loans can be advantageous in the following ways:
- Improve credit score: If you want to boost your creditworthiness as quickly as possible, getting credit builder loans can be a perfect option. Since you need to make repayments on time to get your loan proceeds afterward, you’re able to build positive credit history faster and improve your credit score in the long run.
- No need for a high credit score before taking out a loan: Applying for these loans doesn’t require you to have a previous high credit score. Most lenders offering these financial services don’t consider your current credit history before getting approved. As a result, you can still obtain a loan even with a poor credit score.
- Come with a dual purpose: Another advantage of taking out top credit builder loans is they build your credit score by making monthly repayments on time while also acting as a savings account. That’s because the lender can’t release your funds until you pay your loan in full. When this happens, you’re able to save your loan proceeds, along with earned interests.
- Have Affordable options: Most lenders offer flexible and affordable options. For example, the loan amount you can borrow can range from USD$500 to USD$1,000, and the payment term can be up to 24 months. These options can be helpful because you get to choose how much time you want to spend on building your credit score.
By now, you already know the advantages of credit builder loans. The next thing to do is familiarize some drawbacks associated with these loans. These can include:
- Funds aren’t available immediately: Applying for credit builder loans may not be a good idea if you need some funds to cover an expense. That’s because your loan proceeds are unavailable until your loan is fully paid. If you want your funds to be accessible right away, you may have to make a large repayment to make it happen.
- Require patience to build a high credit score: If your credit score is so low that it can’t be useful anymore, you may need a considerable amount of patience to re-establish a good credit score. However, making repayments in credit builder loans may take some time. If you can’t wait for a long time to be creditworthy again, then these installment loans may not be suitable for you.
- Add struggle to your current payment obligations: If you have outstanding loans to pay, then incorporating credit builder loans may not be a good decision. For example, you may end up making late payments on other loans just to accommodate your credit builder loans. However, these missed payments on your other financial obligations may damage your credit score more than help it.
Dealing with personal finances can be complicated and confusing, especially if you need some funds to shoulder a particular expense. Unfortunately, applying for some loans can become problematic if you have a poor credit score. This is one reason why credit builder loans have become a popular financial option.
However, if you consider getting these installment loans, keep this information in mind to figure out whether they can work best for your needs. By doing so, you’ll become more confident about your decision to take out one or otherwise.