Establishing credit isn't easy, especially since most lenders require a credit history to open an account. A credit builder loan is one way to establish a financial footprint without a credit history.
Instead of the borrower receiving money upfront, the funds are deposited into a savings account or CD account that can't be accessed until the loan is repaid. You'll still pay interest, though a portion may be reimbursed.
A credit builder loan is a good fit if you need to establish a credit history, especially if you can't qualify for a secured credit card or don't have someone willing to let you become an authorized user.
What is a credit builder loan?
With a traditional loan, a borrower is approved and funds are provided in a matter of days. With a credit builder loan, your lender deposits the funds into a savings account or CD for anywhere from 6 to 24 months.
You'll make monthly payments (including interest) and only receive the money once the loan is repaid.
Most credit builder loans are small, ranging from $300 to $1,000, according to the Consumer Financial Protection Bureau. Because of how the loans are arranged, they're not intended to provide up-front funds like a traditional loan. The sole purpose is demonstrate your ability to make timely payments, which are reported to the credit bureaus to use to build your credit history.
- APR (interest rates): You may receive a portion of the interest back when you finish making payments.
- Administrative/application fee: Some institutions may charge a modest setup fee, though you can find ones that don't
- Membership fees: Some lenders charge a monthly fee to enroll in their credit builder program.
- Late fees: As with a traditional loan, a late fee can be charged if payments are delayed or missed, which also hurts the credit history you're trying to build
Where to get a credit builder loan
Credit builder loans are usually offered by smaller institutions, such as credit unions, online lenders and community banks.
Self offers a variety of credit builder loans with monthly payments ranging from $25 to $150. Your payment history is reported to all three credit bureaus, helping to quickly grow your credit history.
Self Credit Builder Account
Annual Percentage Rate (APR)
15.51% to 15.92
Loan purpose
Building credit history
Loan amounts
Payment options ranging from 25$ to 150$ a month.
Terms
24 months
Credit needed
Poor or no credit
Origination fee
N/A
Early payoff penalty
Early withdrawal fee of less than $1, depending on the size of your Credit Builder Account, if your account closes early without being paid off in full
Late fee
Late fee of up to 5% of the monthly payment amount if you don't make the full monthly payment on your Credit Builder Account within 15 days of the payment due date
Terms apply.
What to consider when opening a credit builder loan
Loan size: How much money are you comfortable putting into a savings account or CD for up to two years?
Monthly payment: How much can you afford to pay each month in principal and interest?
APR: Credit builder loans accrue interest, so shop for the lender with the best rate. Credit unions tend to charge lower APRs
Fees: Try to find a lender that doesn't charge an application or administration fee
Reimbursement: Some lenders will refund a portion of your interest charges after you complete payments.
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Self Credit Builder APRs are variable and may change at any time.
