Due to the risk involved with lending, people with good credit have a better chance of getting loans from lenders than people with bad credit. That’s a well-known fact. But before you can build credit, a lender has to loan you money for the first time without knowing the level of risk involved.
Obviously, many lenders would not like to take such a risk. Most times, this makes it difficult for people without credit or with poor credit to get loans. However, a credit-building loan is a risk-free way for lenders to give you a loan even if you have little or no credit.
What Is a Credit-Building Loan?
In a credit-building loan, the lender does not give you the money until you pay the loan’s full price. As a result, the lenders do not risk anything since they are in control of the funds. With this plan, lenders will be more than happy to give a loan to someone with poor credit.
As soon as you receive the money, your payment history is reported to a credit-reporting agency by the lender. This makes it easier for you to gain points. Visit https://www.creditkarma.com/personal-loans/i/credit-builder-loan for more information on this type of facility.
What are its Benefits?
Credit-building loans are great for people trying to raise or build their credit points. Having a high score comes in handy for things like getting funds for your business or getting better interest rates when buying a house or a car. Having a high credit rating also makes it easier to get loans from other lenders.
How Do I Get it?
You can get these loans from banks (if they have this option), online lenders, non-profit organizations, or some other financial organizations. At this point, you need to decide how much you want to apply for. For this kind of loan, it could be anything from $300 to $1000.You need to make sure it’s an amount you can pay on time easily because a late payment will put a blemish on your record, defeating the very purpose for which you took the loan in the first place. These credit-building loans come in three forms and these are the following:
Unsecured Loans
With an unsecured loan, the money is given to you right away. Afterwards, you’re supposed to pay the loan back at the predetermined rate. However, this might raise the interest rate a bit. This is your best option if getting the money right away is your priority. Do keep in mind that it’s mandatory for you to have the capacity to pay
If you don’t already have one, a FICO score will be sent to you. If you already have credit points but are trying to raise them, you may see a rise by about 15 or 25 points. This may not seem like a huge jump, but it adds up over time. It is advised that you always make your repayments on time. This applies to any bills you may have that the reporting bureaus receive information on.
Secured Loans
Loans are “secured” using the money in your savings account. Here, the interest rate a bit lower because you don’t have access to the money until you’ve paid in full. This kind of loan is a good way to establish savings.
Pure Credit-Builder Loans
In this type, the bank keeps the money in a locked account while you pay. With this option, you don’t have to put money down beforehand.
Click here for more information on the different types of credit-builder loans
Important Tips
When applying for a loan, it’s important that you understand the terms and conditions. Keep in mind that these conditions will vary depending on the lender. Also ensure that the lender sends reports to the big credit bureaus such as Equifax, TransUnion, and Experian. As soon as you’ve understood the terms, you can move on with the application.
On a Final Note
Overall, credit-building loans are a good way to gain more points, or build credit if you haven’t got any. Having high credit points makes it easier for you to receive investments and loans from financial institutions. Furthermore, it gives you better interest rates when buying things like cars or houses. Remember that making payments on time improves your credit score.