Getting back on the track financially can be an uphill task, especially if you had bad or no credit altogether. This is because, of course, no lender will want to risk lending you any amount.
This leaves you with a co-signer option to fall back on, but co-signing means putting them at risk as well. Dead end. How about using a secured credit card? Still, no good because you must have money to make the deposit.
It looks like it’s a complete dead end for anyone in such a situation.
Well, maybe not, thanks to online lenders those offer credit-builder loans to people with bad or no credit. This gives them a chance to rebuild their credit or build one from scratch without having to make a deposit.
What is a Credit-Builder Loan?
As the name suggests, a credit builder loan is a loan offered to people without credit history or with damaged credit. This loan will help them build or rebuild credit their history.
The good news about these loans is you don’t need stellar credit for approval. All you need is sufficient funds to complete the installments.
Secured Cards vs. Credit-builder Loans
You’ll only receive the full amount requested after you make all payments. This is unlike other loans which give you the money and then start making the payments.
Here are the two main ways a credit-builder loan differs from a secured credit card:
• You don’t need to make a deposit. But you must be able to make the monthly installments. In contrast, a secured card requires a deposit, which is your credit limit.
• You’ll only have full access to the loan amount after you pay it off. On the hand, a secured card allows you to use up to the credit limit. However, using it requires proper balance when it comes to your credit utilization ratio, which can damage your credit if it goes past the set limit.
From the differences, the main dilemma lies in choosing which type of loan — no need to choose. Rather, you can opt for both. One advantage of using both loans is they can help you build your credit faster. This is because among the factors considered when setting the score is how well you can handle multiple loans.
How it Works
After a Lender approves your application, you’ll receive the loan amount in the form of a certificate of deposit covered by the Federal Deposit Insurance Corp, or one of their partner banks. Afterward, you’ll start making the installments and after completion, then access the money.
The nation 21 loans come with two payment options. One and two-year terms, but first, you must choose the amount you’ll make in monthly payments. The lowest installment is $25 every month and falls under the two-year payment plan.
In addition, you’ll also have to pay a non-refundable administrative fee ranging from $9 to $15. You’ll pay the latter if you opt for a different payment plan. At the end of the plan, you’ll receive $525 and a 0.1%APY. This means at the end of the day; you’ll pay $609 at 14.92% in annual rates.
In the second payment plan, you have the liberty of choosing up to three payment amounts every month. They include $150, $89, and $48. If you choose the higher amounts, prepare for higher administrative fees, but then you’ll benefit from the one-year payment plan.
Also, it’s important to know large loans won’t overturn your fortunes overnight. However, you’ll save on reduced interest. Therefore, take the time to understand your financial situation so you can choose a comfortable amount. Remember, making late payments or skipping them altogether can hurt the very credit you’re trying to build or rebuild.
After making all agreed payments, you’ll have access to the money, and this marks the formation of an emergency fund. In addition, an online lender will continue pushing you to clear the monthly payments through a savings account with their partner bank or through a high-yielding Certificate of Deposit.
During this repayment period, you can monitor your credit through TransUnion. After the loan period, you can also check your credit for free on NerdWallet’s website.
Keep in mind that a direct lender will report your payment progress to the three main reporting agencies. You must also keep in mind on-time payments will improve your score, while late payments will damage your score.
Six months after starting your repayments, you should be able to get a FICO score if you had none earlier. The VantageScore generated by TransUnion will follow soon after. In the event that you decide to close the account before paying off the loan, you’ll still have access to the money in the form of a CD after deducting the money you owe.
Applying for a Loan
Here are the requirements needed in order to qualify for an online loan:
• You must be 18 years old or above
• You must be a permanent US resident
• You must have a Social Security Number
• You must have a debit card or a bank account. If you decide to use a debit card, then certain fees will apply.
In addition, unpaid fees or bounced checks in the past 180 days, which contribute to a negative ChexSystems, will disqualify you. Additionally, you must submit your application on the lender’s website.
Fees and Penalties
Any payment made 15 days or beyond their due dates will cost five percent of the monthly payment penalty. The good news, though, is that direct lender will not report your late payments to any credit bureau until the payment is 30 days overdue.
Continued delayed payment past the 30 days will result in account closure, and a lender will report the loan as defaulted on any subsequent credit reports. After the account closure, you’ll receive your loan deposit, minus the amount owed at the time of the closure and the fees.
Early funds withdrawal means foregoing the 90-day interest, which is no more than a few cents.
Credit Builder loans offer an excellent way of both rebuilding and building credit. Nevertheless, it’s vital for you always to ensure you make on-time payments. Building a strong financial profile through such discipline allows you to earn the lender’s trust.
This will then open doors to future loans such as mortgages and auto loans, not forgetting the favorable ratings you’ll receive from multiple credit reporting agencies.