A credit-builder loan is characterized as an installment loan but with fixed payments per month. A credit-builder loan is similar to a consumer loan, title loan and real estate loan. The credit bureaus will recieve all information about payments in your credit builder loan that can help you build up your credit score.
A credit builder loan differs from a typical personal loan. Instead of you depositing funds upfront, the lender you are working with transferrs the loan
amount (typically $300 to $1,000 according to the Consumer Financial Protection Bureau) into a savings or CD account. The loan amount cannot be accessed until your loan body is repaid back. When you successfully pay back your credit, that’s when you’ll get the money.
Credit builder loans hold money in the bank as security. For this, credit builder loans are treated as less risky for lenders since they require you to save up the money first before you can even access it. This might seem primitive, but remember that the entire purpose of such loans is to show your capability to pay timely for further reporting to credit institutions.
When choosing the loan, assess the following information:
- Administrative charge.
- Loan volume: Assess how much money you can add to a savings or CD account.
- Monthly payment: Remember that the larger the loan, the higher the monthly payment. It’s significant to assess how much you can afford to pay monthly.
- APR: These loans calculate interest at a fixed rate, generally 5% to 16% depending on the lender, state and loan size, so look for the lowest rates.
- Interest charges back: Some lenders may refund you some size of the interest charges you paid back.