When you get a Credit Builder Loan from a lending institution, they do not give you the money from the loan upfront. The lending institution will take the money and put it in an account that you will not have access to until the end of the term of the loan. You will make monthly payments to the loan using your own money. You will end up paying interest on the loan so you will pay more than you will get back at the end. At the end of the loan, when you finish paying everything back, you will then get the original loan amount, plus interest.
Let’s do an exercise. Say you get a $1,000, 12-month loan with 10% from Credit Union.
Your monthly payment will be $87.92. $87.92 x 12 months = $1,055.04. You will end up paying $1,055.04 over the year-long life of the loan, and at the end of the loan, you get $1,000, assuming no interest. Assuming the original $1,000 is invested with no interest (which isn’t likely), you will end up paying $55.04 in interest over the life of the loan. Paying $55 seems like a very small fee to get into the credit world. We all need it, might as well start off on the right foot!
Essentially what this says to me is you are paying to improve your credit. One of the things you can do to minimize your cost is to make sure that the account the lending institution puts the money in is interest-bearing. The interest on these accounts can be as little as 0.01% or as high as 1.90%, so try to make sure it is as high as possible.
Will A Credit Builder Loan Work For Me?
Technically, yes. It is not a long term solution, but if you need short term credit so you can qualify for a credit card, this may work. However, I don’t think this is the overall best solution. In my opinion, I believe it is much more rational to get a secured credit card. If you continue to make payments to get back up to the secured amount, you won’t have to end up paying interest. A lot of secured credit cards have fees and things associated with them, but may also be able to convert to unsecured eventually. Local Community Credit Unions are a popular choice among consumers when it comes to selecting a good credit builder loan company.
Tips & Tricks
If you decide to get a Credit Builder Loan, you have to make sure to make your payments on-time 100% of the time. If it comes to the point that you may miss a payment, it will be better to cancel the loan and get your money back. You will not get all of your money back, but having any missed payments on your credit score can kill your chance of getting any future loans or credit cards.