There is a good chance you have a weak or non-existent credit history. If this is the case, availing a loan at a reasonable interest can be close to impossible. However, with that said, there are many ways for you to boost your credit score so that you can get the loans you want. A proven way of doing this is by applying for credit builder loans.
What is a Credit Builder Loan?
A credit builder loan, also known as a ‘starting over the loan,’ serves as a set of financial training wheels. These loans are meant for people who do not have a credit score or a poor credit score. If you apply for a credit builder loan, you can expect your bank to send the amount you want to a third party. The bank then authorizes the transfer of the loan amount from the third party to you as and when you pay off the loan amount in installments.
Good sources of credit builder loans include credit unions and community banks, both of which are relatively smaller financial institutions. Since you can expect them to release the loan amount only upon payment, you do not need a credit history.
Benefits and Flaws of Credit builder loans
Here are some of the benefits of credit builder loans:
- A credit builder loan can force you to save cash just like you would if you were to deposit your money in your savings account.
- The money that your bank deposits is what secures credit builder loans. Therefore, they are easy to avail.
- You will be able to build financial discipline and apply for bigger loans by making monthly repayments for credit builder loans.
- You will be able to get your money back as you pay off your loan, and at times, a portion of the interest.
- If you delay your loan repayments or not make them at all, your credit scores will be significantly affected.
- When you apply for a credit builder loan, you will most likely be required to pay a one-time administrative fee.
Who can you approach for Credit Builder Loans?
These are the primary sources of credit builder loans:
Lending circles make for an excellent source of credit builder loans. The non-profit mission asset fund finances these lending circles. Typically, you would have ten participants pooling a certain amount of money and lend this to one of the members of the lending circle.
This process repeats until every member of the circle receives the money. Consistent repayments in these circles can drastically bring up your credit score.
Online lenders are another option you should consider. There are a variety of banks and online lenders that can provide you with credit builder loans. If you want to apply for them, you will have to submit essential details, including your name, address, income, date of birth, and a few others. It should not take too much time to get your credit builder loan approved. Examples of banks and online lenders are Republic Bank and Self.
Credit unions, in a nutshell, are a co-operative that a group of people with a common bond form. Examples of this include churches, labor unions, and many more.
Keep in mind that credit unions are unions that are not-for-profit. You need to ensure you become a member to be able to apply for their services. Generally, they expect you to have a common bond with a member of the credit union member because they base all their transactions on the trust and understanding you build. The Financial Conduct Authority (FCA) controls the credit unions in the United Kingdom.
Community Development Financial Institutions (CDFIs)
Community Development Financial Institutions help under-served people and communities. CDFIs enable individuals and companies to avail loans or other lines of credit if they are unable to do the same.
CDFIs are known to provide finance, equity investment, and at times, both. Some enterprises or individuals who are on the lookout for a substantial amount of credit get offered credit builder loans to help them boost their credit, thereby making it easier to secure good lines of credit.
How to Manage your Credit Builder Loans?
Here are a few tips to keep in mind as you try to secure and manage your credit builder loans:
Select the Right Credit Builder Loan
You need to ensure you apply for loans that you have to confidence to repay. Biting more than you can chew will not help increase your rating. The smarter way to about this is to choose a low payment loan term.
Apply for the Loan
When you get your loan approved, ensure the loan amount is sent to a savings account that you cannot access until you are able to clear the entire repayment loan amount.
Making Timely Payments
Make sure you make your loan repayments on time. Delaying your payments by over 30 days can negatively affect your credit score. This reduction in credit score will make it difficult for you to apply for more substantial loans.
Keep tabs on your Overall Credit Score
There are a variety of ways to keep your overall credit score in check without taking any risks. Make sure you monitor your credit score regularly. You can do this by accessing finance sites that have tools to calculate your credit score.