A good credit score helps secure loans from banks and financial institutions. A customer can avail secured loan to build credit. However, fresh borrowers with no credit history, like new graduates and low-income individuals, find it difficult to get loans. Customers rebuilding their credit may have trouble getting approved loans or credit cards. Now, there are loans to help build credit. A credit builder loan (or builder loan) is a type of personal loan that helps build credit. It is different from a traditional loan. Builder loans are created to help customers improve their credit scores.
Customers with a low credit score or rebuilding credit can avail of a credit builder loan to maintain their creditworthiness. Keep reading the article to learn all about builder loans and how they help build credit.
What Is a Credit Builder Loan?
Credit builder loans are easy approval loans developed to help borrowers build credit from scratch or improve their credit score. It is suitable for customers with low credit scores, no credit history, or trouble getting a secured loan to build credit.
A good credit score is a criterion for availing of bank loans and credit cards. However, for credit builder loans no credit check is required.
The best credit builder loan works as the perfect solution for borrowers who:
- Are looking for a fresh credit line
- Want to build their credit history and credit score
- Are fresh borrowers with no credit history and credit score
- Want to clear current existing loan advances
What is Credit Builder Loan Advantage?
The advantages are as follows:
- With credit builder loans no credit check is needed. So, a borrower can pay outstanding loans, improve their credit score, and improve their chances of getting new credit.
- Builder loans are different from conventional bank loans. A borrower need not pay the loan amount upfront. These loans help in financial planning.
- Even a borrower with no credit history can take advantage of builder loans.
How Does a Credit Builder Loan Work?
Before availing of builder loans, a borrower must understand its working.
Lender creates a savings account
The lender opens a savings account with the loan amount. The credit builder loan account might earn interest depending on the lender and the account type.
Borrower makes monthly payments
The borrower must make fixed monthly payments against the loan. A borrower does not get the money upfront. Still, the credit builder installment loan comes with an interest charge.
Lender reports borrower payments to the Credit Bureau
For credit builder loans no credit check is required. Still, lenders must report borrower payment details to the respective Credit Bureau every month. These details include whether the borrower makes the loan payments on time. The reporting helps a borrower build positive credit over time. Regular payments help increase credit scores, while late payments decrease their credit score.
Borrower gets access to the funds
Once a borrower makes all payments on time over the builder loan term, lenders release the funds. They can then access the funds with interest paid minus the fees charged.
What is Credit Builder Loan Risk?
The money borrowed via builder loans is put in a savings account. The borrower must pay back the loan before they get access to the funds in the savings account. These loans help borrowers save money while building credit.
A lender does not release the funds at the start of the loan term. Only when a borrower repays the loan do they get access to the borrowed funds. The credit builder loan holds the borrower’s loan amount as collateral till it is repaid. As such, a lender providing builder loans has no risk.
How to Get a Credit Builder Loan?
These loans are not easily available like traditional bank loans. A borrower can get these loans by following the below processes.
Identify Lenders
A borrower must first search for lenders providing credit builder loans. For instance, a borrower can find a credit builder loan online. These platforms help borrowers get these loans and improve their credit scores.
Determine the Loan Amount
A borrower has to determine how they want to borrow via these loans. The loan amount depends on their commitment to the loan account and their need for improved credit scores.
Compare the Loan Terms
Shop for the best credit builder loan by comparing lender terms. The loan terms include lender fees, interest rate, borrower income, and credit-worthiness. Also, ensure lenders report to the Credit Bureaus. It will help build credit. Check your credit score using online credit score calculator.
Submit Loan Application
Once the lender is finalized, a borrower has to submit the formal loan application process with the necessary documents.
Make Timely Payments
Borrowers must make timely payments to improve their credit scores. They should therefore familiarise themselves with the terms and conditions of the loan.
Final Thoughts
A credit builder loan is an effective solution for people with no credit history or low credit scores. The loan terms vary between lenders. Online platforms like Tata Capital offer personal loan to borrowers at attractive personal loan interest rates. For more details, visit the Tata Capital website.
02 February 2024
5 mins read
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