Addressing Credit Problems With a Credit-Builder Loan
Borrowing money can be difficult for those who have a low credit score. When banks review an application for a loan, their main consideration is whether or not a person can make good on their promise to pay back what they borrow. A low credit score or a credit history indicating a pattern of failure to repay debts is a red flag for many lenders.
Circumstances change all of the time. Individuals who once struggled to make consistent payments may now find themselves better equipped to manage a loan, only to learn their application is being denied because of a difficult financial history. Credit-builder loans were created with these individuals in mind. Let’s see how they work.
Proving Reliability to Potential Lenders
The first step toward strong credit is building a history of repaying debts. For some, this feels like an impossible task simply because their negative credit history is preventing them from qualifying for credit cards or loans in the first place.
A credit-builder loan is actually a reverse loan. The loan is not paid out until it’s paid off in full. This mitigates the risk on the lender’s end while still giving individuals with poor credit the chance to make strides toward a healthier credit score.
How Credit-Builder Loans Work
A credit-builder loan is a unique debt repayment model. The lender, such as a bank or a credit loan company, takes the full amount of the loan and puts it in a savings account for the payee. The payee then makes payments to the lender. Like any other loan or credit card, credit-builder loans are charged interest.
Depending on the terms, a credit-builder loan may be paid off in 6 to 24 months. Once the loan is paid in full, the payee can withdraw the full amount of the loan from the savings account.
A Low-Risk Way to Build Credit
As consistent on-time payments are made, the lender reports this information to the credit bureaus. While it does take time and patience, this information may contribute to improvements in credit history.
Many banks and credit unions offer credit-builder loans. There are also a few online lending institutions, like Fig Loans and Self Lender, offering these as well. Although rebuilding credit isn’t a quick and simple task, credit-builder loans offer hope to individuals who are ready to change the future of their financial health.
~Here’s to Your Financial Health!