How do I get a credit-builder loan?

To get a credit-builder loan, look around at different lenders to find the ones with the lowest interest rates. Then, apply with the best lender. You'll need to provide ID, and possibly other documentation as well.

Where can I get a credit-builder loan?

Credit-builder loans are available at banks, credit unions, and online lenders. Check with your local financial institution to learn if they provide credit-builder loans.

What Is a Credit-Builder Loan and How Do I Get One?

Q: What is a credit-builder loan?

A credit-builder loan is designed for consumers with a limited credit history and for people who need to rebuild their credit score after it's been damaged. It's different from other loans because you don't receive any money until the loan is completely paid off.

Good credit can open up many opportunities, like low mortgage rates, great credit cards, and more. If your credit could use some improvement, don't stress. A credit-builder loan can help. Here, we'll cover the ins and outs of credit-builder loans, including how to find one, what they can do for you, and alternatives worth considering.

What is a credit-builder loan?

A credit-builder loan is a loan that can help you boost your credit score. Credit-builder loans can be helpful for people who have damaged credit. They're also one option for individuals with little to no credit history to build credit.

However, credit-builder loans are not the only way to boost your credit score. For example, credit cards for bad credit, cosigned loans, becoming an authorized user on someone else's credit card, and many other methods can also help you build a credit history.

Credit-builder loans tend to be more expensive than these alternatives, so they shouldn't necessarily be a first choice for building credit history. Make sure you consider all your options before deciding to go with a credit-builder loan.

How does a credit-builder loan work?

Credit-building loans are a little different from other loans. Here's how they work:

You apply for a credit-builder loan (and you're approved).
Instead of sending you the money you're borrowing, the lender puts these funds into an account that you can't access.
You make a monthly payment.
Each time you make a monthly payment, the lender reports it to credit bureaus as being on time.
Each on-time payment raises your credit score.
After a specific number of payments (typically 12 or 18), the credit-builder loan is paid in full. The lender releases the funds to you, and you spend the money however you want.

It's important to note that you don't just repay the amount of money you applied to borrow. You'll pay interest every month, too. You might also pay possibly a small administrative fee. Be sure to ask about fees before signing up for a credit-builder loan.

What is the difference between a credit-builder loan and a personal loan?

When you take out a personal loan, the money you're borrowing is sent to you shortly after you sign the loan papers. That's not the case with a credit-builder loan. A credit-builder loan requires you to pay the loan off in full before you get any money from the lender.

Because of your limited (or damaged) credit history, the lender wants to be sure that you're going to pay the loan before they hand the money over. But this isn't a bad thing. It's good for your credit -- each time the lender reports an on-time payment to the credit bureau, your credit history becomes a little rosier.

If you need money right away, you may want to consider a personal loan for fair or average credit instead. If your credit score is extremely low, try a personal loan for bad credit. If you want to build your credit history, but you don't like the idea of a credit-builder loan, you might want to look into alternatives like secured credit cards or a cosigned personal loan. We go into these alternatives in more depth below.

Where to find credit-builder loans

Credit-builder loans are available through some banks, online lenders, and credit unions. Here's a sampling of where credit-builder loans are available and what they offer:

Alltru Credit Union: Alltru's rates aren't the lowest on the market. However, they'll refund part of your interest payments at the end of your loan. They also offer smaller loans than some other lenders.
Financial Partners Credit Union: Financial Partners Credit Union offers impressively low interest rates for their credit-builder loans. Loan amounts are offered in a healthy range, so you should be able to find something to fit your situation whether you want a large or small loan.
Republic Bank: If your budget is especially tight, Republic Bank might be a good fit for you. They offer long loan terms and competitive interest rates, which translates to lower monthly payments.

How to manage a credit-builder loan

Managing a credit-builder loan doesn't have to be difficult. Here are three helpful tips for making a credit-builder loan work for you:

Understand the credit-builder loan you are considering. If you have any questions, ask before signing on the dotted line.
Only borrow as much as you can afford. In other words, if you can only afford to make a payment of $200/month, don't agree to monthly payments that are higher than $200/month.
Make all your payments on time and in full. You can sign up for autopay through your lender to make this step easier.

Credit-builder loan alternatives

A credit-builder loan is not the only way to boost your credit score. In fact, it tends to be one of the more expensive methods. Here are two other options for building your credit.

Secured credit card

You can get a secured credit card with low or no credit. With a secured credit card, your regular payments are reported to the credit bureaus. This gives you a chance to build a credit history. Let's say you want a secured card with a spending limit of $1,000. You would make a $1,000 deposit to the credit card issuer first -- this "secures" the card. Then, you charge the card and make payments, just as you would with a traditional credit card. Over time, you should see your credit score increase. One caveat: Be careful of the hidden fees and high interest rates charged by some secured credit card issuers.

Browse our top picks for secured credit cards to get started with a secured card.

Personal loan with a cosigner

If you don't qualify for a traditional loan on your own, consider asking someone with excellent credit to be your cosigner. When you have a cosigner, a lender considers the strength of their credit score rather than the weakness of yours. By applying with a cosigner, you have a far better chance of landing a credit card with favorable rates. Your on-time monthly payments are still reported to the credit bureaus, which improves your score.

However, if you miss payments, not only does your credit score suffer, but so does your cosigner's score. Asking someone to cosign for you is a big step. Don't try it until you're sure you can make all monthly payments on time.

If you're thinking of opening a personal loan with a cosigner, start by checking out our list of best personal loans.

Your credit score impacts everything from the price you pay to borrow money to whether you can rent a home or land the job of your dreams. Whether you're just starting out or starting over, a credit-builder loan is worth consideration if you need to increase your credit score.