With a traditional loan, the lender gives you money upfront, and you pay it back in installments. A credit-builder loan works in reverse: You pay the lender monthly installments, then you get the money back at the end. You’re essentially lending yourself money, and because the payments are reported to the credit bureaus, it builds your credit.
Even if you’ve been turned down for a personal loan in the past, you have a good shot at a credit-builder loan. The lender isn’t putting its own money at risk, and it holds your money in a savings account until the loan is fully paid. When the lender is protected like that, it can make these loans available to people with thin credit or no credit.
The key is to make all of your payments on time. Do that, and your credit reports will get an influx of positive data. Make just one late payment, though, and it will also show up on your credit report. That can undo a lot of the positive momentum built by on-time payments. That’s because your payment history accounts for 35% of your credit score.
As with a traditional loan, you’ll pay some fees to take advantage of a credit-builder loan. Look for a local credit union or online lender to find a credit-builder loan that you can make work with your monthly budget. Loan terms usually last at least six months but can stretch out as long as 24 months.