Credit builder loans – How does it work?

There are some ways to build good credit, and today, Oxford Finance Services will show you what credit builder loans are.

Lending involves risk. It’s a fact that we need to comprehend when asking for a loan. Obviously, lenders are more inclined to lend money to people with a good credit score.

So, what does this mean? It’s not like when you have recently graduated from college, and they ask you to have five years of experience when applying for your first job.

The name is pretty self-explanatory, but first, let’s understand why credit builder loans are a thing and why you should get one if your credit score is not good enough.

Yes.

You never know when you will need an installment loan or any other type of loan to cover an expense.

Medical emergencies and unexpected situations happen all the time. We cannot control this. Therefore, if we need to apply for a loan, having a good credit score will help us accelerate the whole process.

Besides, it is clear that lending money to people whose riskiness is unknown doesn’t seem like a good deal from the lender’s perspective.

But what if you are young and you are starting building credit for the very first time?

What are your options?

Well, this is when credit builder loans come into the scene.

Some people don’t like taking credits, some do, but the truth is that, in our country, credits are a powerful financial tool to help us improve our lifestyle.

You might not need a loan right now, but you might need it in the future.

First of all, let’s start with the basics.

A credit-builder loan is a loan designed to help people with no credit (or little credit) history to build a decent credit score.

As we mentioned before, having a decent credit score is the ultimate goal of credit-builder loans.

Needless to say, these loans do not require to have a good credit score for approval, but there are some basic requirements needed, like having enough income to make monthly payments.

First of all, let’s start with the basics.

A credit-builder loan is a loan designed to help people with no credit (or little credit) history to build a decent credit score.

As we mentioned before, having a decent credit score is the ultimate goal of credit-builder loans.

Needless to say, these loans do not require to have a good credit score for approval, but there are some basic requirements needed, like having enough income to make monthly payments.

There are two main scenarios where credit-builder loans are a good fit.

The first one is if you are a newbie. If you never had a loan before with a financial institution, a credit-builder loan will help you construct your credit history from scratch.

On the other hand, if you have a low credit score and want to improve it, you can also ask for a credit-builder loan. 

That’s why credit-builder loans are also called “Starting Over Loans” and “Fresh Start Loans.”

Just remember to make all payments in time. If you fail to fulfill your duties as a borrower, your efforts to improve your credit history will go to the trash.

Let’s say to apply for a credit builder loan and get approved for it. The total amount of money you’ll borrow will be held in a bank account while you make all the payments.

Typically, borrowers can’t access the money until the loan is fully repaid. 

As a consequence, credit builder loans are also a great way to save money. You are creating a little safety net for your future while improving your credit history; it’s a win-win situation for most people.

If you pay on time, your payments will be reported to at least one of the major credit bureaus in the U.S.A:

• • Equifax.
  • Experian.
  • TransUnion.

They will compile all the information obtained from your credit-builder loan, and your credit will improve, then again, only if you make all your payments on time.

There are three main institutions that can help you get a credit builder loan. 

• • Online lenders: some online lenders can offer you credit-builder loans, but it is essential to check if the lender is licensed by the state you live in.
  • Community Development Financial Institutions: the CDFIs help lower-income families to get loans of different types.

Community banks or Credit unions: these institutions are the main options for getting a credit builder loan approved.

First of all, keep in mind why you are getting a credit builder loan, well, it is meant to build credit!

That being said, you need to adapt your budget to a loan that you can actually afford over time. Missing a payment will result in getting your score damaged, so you don’t want to take a chance.

Pick the correct type of loan and ensure that the lender company reports to all major credit bureaus previously mentioned.

Also, don’t forget to monitor your credit score constantly. Don’t get obsessed with it, but check it from time to time to see the results of your new loan.

First of all, keep in mind why you are getting a credit builder loan, well, it is meant to build credit!

That being said, you need to adapt your budget to a loan that you can actually afford over time. Missing a payment will result in getting your score damaged, so you don’t want to take a chance.

Pick the correct type of loan and ensure that the lender company reports to all major credit bureaus previously mentioned.

Also, don’t forget to monitor your credit score constantly. Don’t get obsessed with it, but check it from time to time to see the results of your new loan.

Yes, there are. You can get a certificate-backed loan if you have money in the bank. 

The deposit that’s already in your account will serve as collateral, and the amount will be held until you “repay the loan.”

Other alternatives are also available for people who are just starting to build credit. For instance, if you ask a relative or a friend to authorize you as their credit card user, the account history will directly affect your credit score. 

Finally, secured credit cards are also a good option. Consider that these cards require an upfront deposit before being used, but don’t you worry, it will be worth the investment.

Having a decent to excellent credit score is one of the most essential things in our modern economy.

Remember that we should always go one step further and use all the tools at our disposal to create a positive impact in our financial life.

So, get a credit-builder loan, improve or build your credit from scratch, and be prepared for your next step!