Managing your money can often be a complex procedure, especially when you have low, no or bad credit. Raising your credit score and unlocking your financial future is a multi-layer process that should include credit builder loans. Learning more about these financial instruments and using them wisely can help you weather money problems, manage debt and balance your budget.
What is a Credit Builder Loan?
A credit building loan is any small loan designed to help you improve your credit score. You can borrow a few hundred or a few thousand dollars, make timely payments and know the lender is reporting to the credit bureaus as often as possible.
The Magic of Credit Building Loans
The lender should use a soft inquiry to reduce the impact on your credit, and the underwriting process should be fairly simple. In effect, these loans are designed for those with little to no credit history. You might also use these loans to rebuild your credit if you have bad credit.
Are Payday Loans the Same As Credit Builder Loans?
Credit building loans are not the same as payday loans. Payday loans forward you cash before payday — with the expectation that part of your paycheck will help you repay the loan.
Loans focused on improving your credit loans help you stop using credit cards for certain expenses, but they also help you build a solid payment history that goes on your credit report. More than anything, these loans should help you manage your money when you are underemployed, your budget is upside down or you experience other issues that leave you in need of extra cash.
What to Look for in Credit Builder Loans
When you hunt for a credit builder loan, you are looking for a few things that make the loan easy to understand and manage. Any loan you look at should:
Offer a soft inquiry or no credit check at all. No credit check loans are excellent, but they are not always available. At the very least, ensure that the lender is not making a hard inquiry into your credit.
Come from a reputable lender. You can check the reputation and reviews of any lender, ensuring that they are both reputable and offer quality customer service.
Provide near-instant funding. You want to know the money you borrow is coming to you as quickly as possible. When handling your loan electronically, you should be able to accept a direct deposit of those funds rather than awaiting a check or visiting a bank branch.
Offer low rates and fair terms. Ensure that the interest rate is low enough that you can afford the payments. Plus, look into the repayment terms. If you feel the payments are too high, choose a different lender or renegotiate the loan.
Report to all 3 credit bureaus. One of the most confusing parts of the credit industry is where your financial dealings are reported. There’s no way to know where a lender or credit card issuer will report your payments. Some use Experian (OTCMKTS: EXPGY), but others use TransUnion (NYSE: TRU). Still more use Equifax (NYSE: EFX). You must be certain that the lender reports to all 3 bureaus, thus raising your credit across the board.
It can be frustrating when you work hard to rebuild your credit, but the mortgage lender, auto financier or apartment complex all likely use different credit bureaus to pull reports.
Who Could Use a Credit Building Loan?
A credit builder loan is not consigned to the back pages of magazines and coupon mailers. Anyone can use these loans to gently and efficiently improve their credit. Consider all the instances in which a loan like this could be useful.
While you may only require a few hundred dollars, a credit building loan can help you with a special purchase. Things happen in life, and you may need to make that 1 extra purchase that helps you or your children get ahead. Everything from a special gift to a school trip, tools for work or a household comfort can be paid for with a credit building loan.
Emergencies happen. Often, life is going quite well until you’re tripped up by an unforeseen circumstance. A quick-funding, credit building loan can help you pay for the emergency immediately while also aiding your credit score.
A Little Extra Cash
There are moments in life — vacations, the holidays, birthdays — when people wish there was a little extra cash. Instead of dipping into your credit cards, you can use a credit-building loan to access the cash you need and improve your credit score with timely payments.
School expenses can pile up for a range of things from field trips to band fees, sports and supplies. If you need a single infusion of cash, look into a credit building loan that helps you access the money you need. A loan like that can be especially helpful for struggling college students who are constantly bombarded with expenses.
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Look Into Credit Builder Loans Today
With these tips, you can use credit builder loans to both improve your credit and help manage your money. With the judicious use of loans and credit-positive financial products, you can get that much closer to financial freedom. Return to Benzinga at any time for more financial tips, tricks and advice.
Frequently Asked Questions
Do banks offer credit builder loans?
Certain banks offer credit builder loans, but these products generally come from digital banks, financial platforms or virtual payment institutions. Before signing off on a credit builder loan, check the rates and terms of the loan. You do not want to pay exorbitant rates or lock yourself into impossible repayment terms.
Is a credit builder loan a hard inquiry?
Review the terms of the loan application before proceeding. Some banks, financial platforms and lenders offer a soft inquiry while others use a hard inquiry. If at all possible, you want to avoid hard credit inquiries.