As a borrower, you definitely know and understand the importance of having good credit. When you have a poor credit history or no credit history at all, it can be difficult to access a variety of financial services whenever you need them. Because of this, you need to build or improve your credit score to reinforce your eligibility as a borrower. This is where credit builder loans come into play.
Primarily, a credit builder loan is a type of financial service that’s designed to help borrowers establish their credit or strengthen their impaired credit. But, unlike a traditional loan, you don’t have access to the money you’re borrowing. Instead, the lender deposits the money borrowed into an account they control and you make the repayments on the loan and the lender submits a report to the major credit bureaus in your state to add or create to your credit history. After paying the loan in full, the lender will give you the funds for your own use.
However, just like other loans available in the market, applying for credit builder loans comes with several important considerations. Below are the three things to consider before taking out credit builder loans:
1. Qualification Requirements
Since credit builder loans are designed to help borrowers create or improve credit history, applying for them doesn’t have to be difficult. Even if you have bad credit, you can still have higher chances of getting approved for such a loan because credit score isn’t the primary qualification criteria for borrowers.
However, similar to other types of loans, your lender may focus on your income when reviewing your application. This means they’ll check your income status and other related factors to see if you’re eligible for a credit builder loan. Hence, if you can’t show you have stable income each month, your lender may consider it a red flag that dictates them to reject your application.
As such, it’s best to have regular income to show your ability to make loan repayments. Aside from your income, some lenders may also ask for employment verification, important details about your existing savings and debts, and other information that help them verify your identity. Also, if you’re looking to build or boost your business credit, make sure you’re eligible to take out credit builder loans for businesses, such as net-30 accounts from financial institutions like Credit Strong. That way, you can start building your credit as soon as possible.
Apart from the qualification requirements, it’s also important to consider the costs of credit builder loans before applying for them. Typically, the costs vary from one lender to another. But, to give you an idea as to how much a credit builder loan costs, the following factors need to be kept in mind:
- Annual Percentage Rate (APR): This is the percentage rate that your lender bills you when you take out a credit builder loan. In some cases, the rate is less than ten percent with this type of loan, but others may have higher rates.
- Interest Payments: Since most lenders may keep some or all interest rates, the cost of your loan at the end of its term may be lesser than what you have to pay with a traditional loan.
- Loan Repayment Term: When you have a longer repayment term, you may need to pay more interest, which means spending more money in the long run.
- Other Fees and Costs: The lender may charge additional fees for your loan application or even a late fee for not paying on time.
- Minimum and Maximum Loan Limits: If you borrow a larger amount of money, it may take longer for you to pay, which means you need to set aside more money for the interest rate.
3. Type Of Lender You’ll Be Dealing With
The success of your credit builder loan may depend on the type of lender you’ll be dealing with. Just like other financial services, there are different lending institutions that offer various credit builder loans. But, if you want to get the most out of your application, you need to choose the right lender that suits your needs. The following are some lenders you may want to consider:
- Online Lenders: If you’re looking for a more convenient way of taking out a loan, dealing with an online lender can be a good idea. However, not all online lending institutions are licensed in your state. So, make sure to do thorough research before choosing one. Doing so can also allow you to compare payment terms, interest rates, and many more.
- Credit Unions: If you want to pay a lower interest rate, a credit union in your community can be a great place to go. But, before you can apply for a credit builder loan, certain requirements like being a resident in a particular country, working in a company, making a donation, and many more should be considered.
- Community Development Financial Institutions: If your credit union doesn’t offer credit builder loans, a community development financial institution can be your best option. If you belong in a lower-income community who have been locked out in the financial system, this institution can help you.
Indeed, a credit builder loan can be an effective tool for building or improving your credit score. But, if you want your application to be a great success, keep the things mentioned above in mind from the get-go. That way, you can ensure you’re taking out the loan wisely.