Since lending involves significant risk, lenders are more inclined to provide financing to borrowers that have a good credit score. A credit score is simply a numerical representation of your credit history. But what if you do not have a credit history or a poor credit score? A credit builder loan can certainly help you in building up a credit profile or improving your low credit score. 

Unlike a traditional loan, in this type of loan the borrower will have access to the loan amount only after paying off the loan amount in fixed Equated Monthly Installments, or EMIs. During this repayment period, the loan amount deposited by the lender is maintained in the borrower’s savings or CD account which can only be accessed after the loan is repaid. The repayment is reported to the Credit Bureau which helps in developing the credit score of the borrower.

The Best Credit Builder Loans in 2022

Credit Strong – Best for a large loan amount

Credit Strong is a secured lending facility that helps people in building credit scores through credit builder loans. This division of Austin Capital Bank provides lending to people in all states except for Wisconsin, Vermont, and North Carolina. 

A Credit Strong account works like a reverse installment loan where the loan amount is maintained in a separate savings account which can be accessed only after paying off the loan amount. The account can be canceled by the borrower, which significantly reduces the risk of adversely affecting the credit score due to non-payment.

Pros & Cons

Pros

  • No credit checks required.
  • Payment of installments reported to all three credit bureaus.
  • Application money is refunded if the loan is canceled by the borrower.
  • Offers a payment term of up to 10 years. 
  • No charges or prepayment or early termination.

Cons

  • Interest rates are higher than traditional loans.
  • The borrower needs to have a bank account with a debit card and prepaid card to qualify.

MoneyLion – Best for easy access to funds

MoneyLion is a financial services company that offers credit builder loans to borrowers through its membership program. To obtain a credit builder loan from MoneyLion you need to be a Credit builder Plus member for a monthly membership fee of $19.99. This membership will provide you with opportunities to claim rewards that will help to recoup the membership fee. 

A maximum loan amount of $1,000 is given, out of which you will receive some funds soon after the loan approval. The remaining amount is maintained in a Credit Reserve Account which can be accessed after completion of payment of installments.

Pros & Cons

Pros

  • Reports the payment of installments to all three credit bureaus.
  • No credit inquiry of the borrower performed.
  • Competitive APR on loan.
  • Free credit monitoring. 
  • Dedicated MoneyLion app.
  • Cash advance up to $300 per day.
  • No prepayment penalty.

Cons

  • High monthly membership fee.
  • Absence of any physical branches.
  • Small loan amounts.

SeedFi – Best for payment flexibility and costs

In SeedFi Credit Builder Loans, the borrower needs to make monthly payments varying from $10 to $40 which are maintained in a savings account. After completion of the loan term, the borrower gets access to the cash along with a boost to their credit score. The loan period at SeedFi varies from 7 to 27 months. The total cost of their Credit Builder is about a $1 every month. For every payment completion of $500, the borrower gets access to $500 from the loan amount.

Unlike other credit builder loans, SeedFi offers the flexibility of proactive closure of the borrower’s account 29 days late in case of financial distress to avoid any negative reports to the credit bureaus that can adversely affect the credit score. However, the facility is not available for Credit Builder Prime account holders since they are allowed to adjust the installment amount based on their financial condition.

Pros & Cons

Pros

  • No credit checks required.
  • The payment is as low as $10 per installment.
  • The flexibility of proactive account closure to safeguard credit score.
  • Availability of Credit Builder Installment Edition and Credit Builder Prime. 

Cons

  • The borrower must have an income of at least $10,000 per year.
  • Should be at least 18 years old..
  • The borrower should be a resident of the State where SeedFi is licensed.

Digital Federal Credit Union – Credit union membership, low rates, no fees

With a credit builder loan, Digital Federal Credit Union deposits the loan amount in an interest-bearing account. The borrower then pays in monthly installments to the lender along with the interest and receives the loan amount in their savings account after completion of the loan term. The loan amount varies from $500 to $3,000 with a loan period of 12 to 24 months. The borrower earns dividends on the funds available at their DCU Savings account at the published rate of interest.

Pros & Cons

Pros

  • A monthly report of satisfactory payment is sent to all three credit bureaus.
  • Upon satisfactory completion of 12 months' payment, the borrower may receive a discount of 0.5% on the subsequently approved consumer loan.
  • No credit check is required.
  • Low fixed APR of 5%.
  • No processing fee.

Cons

  • The borrower should be 18 years old with a Social Security Number.
  • Need to be a member of the Digital Federal Credit Union.

FAQs

How do credit builder loans help to build credit?

A credit builder loan taken by the borrower is deposited in a specific account. The borrower then starts paying the amount in installments after completion of which the borrower gains access to the loan amount. Through constant reporting to the credit bureaus of your consistent on-time payment of the loan amount, your credit score is improved.

What to consider while applying for a credit builder loan?

Some of the factors worth considering while taking a credit builder loan are the administrative fee, the loan size, monthly installments, annual percentage rate, and refund of interest charges.

What are the tips to manage a credit builder loan?

Some essential tips to manage a credit builder loan are:

  • Picking the right type of loan depending on your requirement.
  • Making timely payments.
  • Monitoring your credit score.
  • Deciding your future course of action with the loan proceeds along with the interest, if any.

Which is the best credit builder loan provider?

There are several credit unions, community banks, and online lenders offering credit builder loans under different terms and conditions. While some are suitable for large loan amounts, others are suitable for their flexibility and easy access to funds. Based on this, the best credit builder loan provider may vary depending on your credit requirement and the purpose of such a loan.

Conclusion

If you do not have any credit history and looking to improve your credit score then credit builder loans can be an affordable way to serve your purpose. Remember to maintain responsible behavior towards any loan repayment even after repayment of your credit builder loan to avoid your credit score from going down. Make sure to conduct in-depth research to choose the best credit building loan provider in the market depending on your requirement.

Related: Best Debit Cards that Build Credit

About the author 

Greg Lorenzo

Greg is a financial expert who has been advising his audience on loans for over 10 years. He has a wealth of knowledge and experience in the area, and he is passionate about helping people get the best possible deal on their loans. Greg is an expert in negotiating loans, and he has a proven track record of getting his clients the best possible terms. He is also a strong advocate for financial literacy, and he regularly gives workshops and seminars on the topic.

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