What is a credit builder loan?

by julius.brown , in category: Banking and Credit , 9 months ago

What is a credit builder loan?

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1 answer


by millie , 9 months ago


A credit builder loan is a type of loan designed specifically for individuals with little to no credit history or a poor credit score. The purpose of a credit builder loan is to help borrowers establish or improve their creditworthiness by building a positive payment history.

Unlike traditional loans where the borrower receives the loan amount upfront, with a credit builder loan, the lender places the borrowed funds into a secured savings account or certificate of deposit (CD) that the borrower cannot access until they have made all the required payments. The borrower then makes fixed monthly payments towards the loan over a specified period, typically ranging from 6 months to 2 years.

As the borrower makes timely payments on the credit builder loan, the lender reports the positive payment history to the credit bureaus, which helps in building a credit profile and improving the credit score. After the loan term is complete, the borrower can access the funds in the savings account or CD, along with the accrued interest.

Credit builder loans are often offered by credit unions, community banks, or online lenders, and they generally have low interest rates and fees. They are considered a safer option for borrowers without established credit since they do not require a credit check and are secured by the borrowed funds.