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What Is a Credit Builder Loan and How Does It Work?
Building credit may seem like a vicious cycle at some point. While you need to demonstrate responsible financial behavior to start growing your credit score, most lenders are unwilling to lend money to people without a strong credit history.
Fortunately, credit-builder loans can come to the rescue. They are designed specifically for individuals who want to establish credit from scratch or improve their less-than-perfect ratings. Such loans have relaxed eligibility requirements but also come with certain peculiarities.
BadCredify is here to help you find the best credit-builder loan option and learn more about how it works.
3 Best Credit-Builder Loans for 2025
- Be an adult US resident;
- Have a valid ID and/or provide a selfie while holding it;
- Have a bank account with a history of recurring deposits open for at least 2 months;
- Have a steady source of verifiable income;
- Be in good standing with the service.
- Origination fees: None;
- Monthly fee for credit builder plus membership: $19.99;
- Late payment fees: None;
- Prepayment penalties: None;
- Turbo Transfer fee: 2.5%;
- Instant deposit fee: up to $8.99;
- A monthly account fee: $1 to $5.
- Interest-free loan options;
- Credit-building opportunities;
- No hard credit checks;
- Bad credit is accepted;
- No mandatory fees;
- Instant deposit is possible.
- Extra fees for fast funding;
- Those with external accounts who don’t pay an express fee may wait up to 5 business days to get the funds;
- Small loan amounts;
- A monthly fee is required for a credit-builder loan;
- Very short repayment terms for Instacash.
1 to 2 business days for RoarMoney account holders. 2 to 5 business days for borrowers with external checking accounts. Instant deposit is available in exchange for an express fee.
Borrowers with bad or no credit looking for interest-free financing or people who want to build a strong credit presence.
MoneyLion is a fintech service specializing in small, short-term, interest-free loans of up to $500. The company has no mandatory fee and doesn’t perform hard credit checks, making its loans available to people with bad or no credit. It also offers credit boost via its credit-builder loans. However, the service charges extra fee for instant funding and a monthly membership fee for helping you improve credit.
MoneyLion is a great way to get extra cash for short-term needs without paying interest.
- Higher borrowing limits and shorter funding times for RoarMoney account holders;
- The ability to change the due date;
- Budgeting and investment tools;
- You can get connected with a trusted personal loan lender for a higher loan amount.
- Be at least 18 years old
- Prove your US citizenship or permanent residence
- Live in states the company operates in
- Provide your bank account information
- Show your monthly income by providing pay stubs, tax forms, or bank statements
- Provide an active email address and phone number
- No fees for loan processing, late payments or prepayment
- Quick access to loan funds
- No prepayment penalties
- No origination and late fees
- Flexible monthly payments
- Reports on-time payments to credit bureaus
- Borrowers with any credit can qualify
- High interest rates
- Small loans amounts
- Hard credit checks are performed
- Not available in all states
One business day (same-day funding not available).
Poor credit borrowers who can’t qualify for traditional personal loans
Rise gives a credit boost to borrowers with low ratings by reporting payments to two major credit bureaus. Fast funding and lenient requirements are overshadowed by high rates.
Rise does not conduct traditional credit checks on its clients. Instead, it looks at applicants’ overall financial situation. Customers can also apply in the morning and obtain their personal loan before the end of the day.
- Quick funding
- No origination fees
- Soft credit checks performed
- Be a U.S. permanent resident
- Live in a qualifying area
- Be at least 18 years old
- Have a valid bank account
- Provide income confirmation (the income should be received via direct deposit)
- Origination fees: None
- Late payment fees: None
- Prepayment penalties: None
- Non-sufficient funds fees: May vary by state
- Accepts borrowers with damaged credit
- Same-day funding is possible
- No origination, late, or prepayment fees
- Soft credit checks only
- Convenient loan minimums
- Very high APRs
- Low maximum loan amounts
- Suspected of loan term misrepresentation
- Not available in all states
Same-day or next-day funding, depending on the time you apply and get approved.
Bad credit borrowers looking for last-resort financing options
OppLoans offers small loans with fast funding, bad credit tolerance, and credit-building opportunities. However, it has APRs of up to 195% and was suspected of misrepresenting its loan terms.
OppLoans can help applicants with low credit scores get much-needed financial support and rebuild their credit. It offers fast and accessible loan options that can be a helping hand for people in a tight financial spot.
- Almost instant approval decisions
- Financial education
- TurnUp program
- Credit-building opportunities
What Is a Credit-Builder Loan?
A credit-builder loan is a small loan that provides opportunities to establish or improve credit by making upfront, on-time payments. The money is not distributed to a borrower until the loan is paid off in full, which involves less risk for lenders.
Loans to help build credit come with no minimum credit score requirements. They usually come with short repayment periods between 6 and 24 months. The amounts usually range from $500 to $5,000.
How Does a Credit-Builder Loan Work?
A credit-builder loan requires you to make your monthly payments upfront without getting any money in advance. The lender opens a locked savings account and stores your money in it until the repayment period ends.
Each of your on-time payment is reported to credit bureaus, gradually improving your credit standing. Once you have paid off your loan, you get your funds back and can use them toward your savings goals or current financial needs.
Like with any other loan options, credit-builder loans involve interest rates you need to pay in addition to the initial amount. However, some lenders may allow you to earn dividends on the money you store in their savings account.
Where Can I Find Credit-Builder Loans?
Credit-builder loans are not widely advertised. They are typically offered by local banks, fintech companies, online lenders, and credit unions. It’s important to shop around for a better offer since the loan terms may differ from lender to lender. At BadCredify, you can access several loan options and compare potential conditions in just 5 minutes.
Rates & Fees
Loans for building credit usually come with fixed interest rates ranging from 6% to 16%. However, some lenders may charge higher interest rates depending on the risk level a borrower carries.
Some loan providers offer regular installment loans for bad credit borrowers that come with credit-building opportunities. These options may even cost you up to 300% annually, making them an expensive option that requires thorough consideration.
Besides interest rates, you may also have to pay upfront fees, monthly membership fees, late payment penalties, and administrative fees. Their amount depends on the lender’s policy.
Here’s a representative example that shows how much you can expect to pay for a 12-month credit-builder loan for $1,000, depending on its APR:
| APR | Monthly Payment | Total Cost | Total Interest Paid |
|---|---|---|---|
| 6.99% | $86.52 | $1,038.27 | $38.27 |
| 12.4% | $89.04 | $1,068.43 | $68.43 |
| 15.99% | $90.73 | $1,088.71 | $88.71 |
The examples above are only estimates. Feel free to fill out a simple form via BadCredify to access personalized loan offers from several loan providers and use our loan calculator to determine their potential costs.
Loan calculator
ESTIMATED MONTHLY PAYMENT
TOTAL LOAN AMOUNT PAID
TOTAL INTEREST PAID
TOTAL COST OF LOAN
Pros and Cons of Credit-Builder Loans
Credit-builder loans come with their advantages and drawbacks. Consider them carefully to make an informed decision.
Pros
- May establish strong credit. By paying timely, you can build a good credit history. This will improve your chances of getting favorable loan terms in the future.
- Can build savings. You can consider a credit-builder loan as an emergency fund or a piggy bank to finance your future needs.
- Lenient requirements. Credit-builder loans are easier to qualify for. You can get one even with bad or no credit.
- Low APRs. Loans that build credit usually come at lower costs compared to other borrowing options.
Cons
- You don’t get the money upfront. A credit-builder loan works mostly like a savings account. Before you get the money on hand, you need to make on-time payments upfront.
- Your credit score may go down. If you pay late or miss your payments, this loan can negatively affect your credit history.
- Interest rates and fees will be applied. Besides your initial loan amount, you should also pay interest and extra charges.
How to Get a Credit-Builder Loan?
A credit-builder loan falls under the category of loans that are quite easy to get. You don’t need to meet any strict credit score requirements or have a good credit standing. However, you still may be subject to a hard credit check.
To apply for a credit-builder loan, you need to choose the lender and fill out its application form online or in a store. At BadCredify, you can complete just one simple online and receive multiple personalized offers in a few minutes. This process doesn’t hurt your credit score, allowing you to compare offers and choose the best possible terms without any risk.
To complete the final application, you may be asked to provide the following information and documents:
In most states, you need to be at least 18 years old to qualify for a credit-builder loan.
Recommended Loan Uses
Loans to build credit can be spent on any personal needs once you have repaid the money in full. However, most people use them for their savings goals or as an emergency fund. You can also spend the funds on your dream vacation or use it as a starting capital for your small business.
Is a Credit-Builder Loan Worth It?
Credit-builder loans are good for people who want to establish a strong credit history from scratch. According to the study by the Consumer Financial Protection Bureau, most individuals who apply for credit-builder loans with no existing debts see better results compared to people who have current loans. The difference may be as high as 60 credit points.
Thus, borrowers with existing debts may find better credit-building options.
Alternative to Loans to Build Credit
Besides a credit-builder loan, there are a few more options that can help you improve your credit scores:
Get a secured credit card
Secured credit cards work similarly to regular ones but require an upfront deposit. This deposit typically serves as your credit limit. If you manage to pay off your balance on time, your credit scores will increase. Then, you can convert your secured card into a regular one with a higher limit and get the deposit back.
Apply for a secured personal loan
A secured personal loan can be a great way to boost credit scores for people with no or poor credit. It’s more accessible than an unsecured one due to the collateral you provide. As the lender can repossess your pledge if you default, giving you such a loan becomes less risky for them. Your payments are also reported to major credit bureaus.
Take out an unsecured personal loan
An unsecured personal loan can be a good way to boost your credit score if you make on-time payments. However, their accessibility is limited. You’re most likely to be denied an unsecured loan with no or low credit score. Even if you qualify, you typically face higher interest rates and less favourable loan terms.
Integrate your bills into your Experian FICO score
The tool called Experian boost allows individuals to add eligible rent, utility, cellphone, and some streaming service payments into their Experian FICO score. This way, you will be able to build credit without going into debt. However, this tool won’t help you with TransUnion and Equifax credit scores.
Become an authorized user
One more way to boost your credit is to become an authorized user. To do this, you need to add your profile to a credit card holder with good or excellent credit. The account history of the primary user’s credit card will then be displayed on your credit report.
Why Choose Us
At BadCredify, we help people find and compare loan options they can potentially qualify for. By filling out just one pre-qualification form, you get access to multiple loan offers with personalized terms based on the information provided. Our innovative platform makes the borrowing process easy and straightforward by simplifying the selection stage. Our team of experts provides fair and unbiased lender reviews to help you make informed decisions. We also pay attention to financial education, providing our clients with insights and practical tips on personal finance, debt management, and money borrowing.
FAQ
Can I use a personal loan to build credit?
You can use a personal loan to build credit if you meet the lender’s eligibility requirements. In most cases, borrowers with no credit face problems when they try to get personal loans. Therefore, these loans will suit you more if you have at least fair credit and want to continue growing it.
What will happen after a credit-builder loan is paid off?
Once you paid off your credit-builder loan, the lender will transfer the initial amount back to you. In some cases, you may receive dividends earned from your savings. You will also establish a credit score.
Is it possible to pay off a credit-builder loan early?
You can pay off a credit-builder loan early by covering the remaining principal balance at once. Just keep in mind that it will limit your credit-building opportunities.
How much do credit-builder loans increase my credit score?
If you have no other existing debt, a credit-builder loan can increase your credit score by about 60 points.
What minimum credit score do I need to get a credit-builder loan?
There are no minimum credit score requirements you need to meet. Credit-builder loans are designed specifically for people with no or low credit.
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