If you don’t have any credit, you’ve probably figured out it’s hard to establish it without getting approved for a loan or credit card. After all, who wants to loan you money before you’ve proven to the world that you can pay it back?
Likewise, if you have bad credit, you may have learned the hard way that it’s easy for your credit score to slip, which makes it even more difficult to get approved and reestablish your credit rating.
Fortunately, you do have options. Plenty of people bounce back from bad credit or establish their credit from a starting point of zero. In fact, a new fintech company called Self Lender is offering a product that helps you do just that.
What is a Credit Builder Loan?
A credit builder loan is a unique way to build your credit. However, it’s quite different from a traditional loan. With Self Lender, you get approved for a loan, then they put the funds into a CD for you, then you make payments toward your loan. When it’s paid in full, you get the balance, plus interest.
Here’s how it works:
● You apply and get approval for one of a variety of loan plans.
● Self lender puts the loan funds into a CD for you.
● The loan has a term, during which you cannot access the money.
● Repay the loan in monthly installments. Doing this builds your credit.
● When the loan is repaid, you get the money, as well as interest earned on the loan.
In other words, it’s a loan because Self Lender deposits the amount as a certificate of deposit into one of its partner banks, but you earn interest and build credit while making your payments. It’s as if you put those payments into a savings account but because it’s a loan, you’ve also built credit.
Why a Credit Builder Loan is Better Than a PrePaid Debit Card
Many people believe they can use prepaid debit cards to build up their credit. However, Self Lender is a better option for several different reasons.
First, it does a better job of building up credit. Unless your payments to a prepaid debit card are reported to the credit bureaus, it won’t help you build your credit. Self Lender reports to all three of the major credit bureaus. Each experience varies, but users have increased their credit scores just by using a Self Lender credit builder loan.
As you repay your credit builder loan, you establish a solid credit history. This is important for young people who don’t yet have credit. It’s also great when trying to improve your credit or rebuild it after a financial mistake.
Second, with Self Lender, you basically pay yourself monthly for money you can use later. Technically, you do something similar when using a prepaid debit card. You pay now for the card, then you get to use the money. However, when the money runs out, you have to add more.
In contrast, with Self Lender, you’re essentially setting aside that money for yourself to use at a specific point later in time. In that way, it’s like a savings account. It’s a great way to save for a big expense.
Moreover, you won’t ever earn interest with a prepaid debit card. In fact, you could end up paying hundreds of dollars in fees just to use the card. In contrast, a credit builder loan tends to have more favorable economics.
Self Lender also lets you check your credit score at no cost.
Note That You Do Pay a Fee
It’s important to be fully aware that there are fees with Self Lender loans. First, there’s a small, non-refundable administrative fee. At the time of this review, that fee is $12. Plus, you’ll pay interest on the loan, but it won’t be higher than 16%.
You can use the “pricing plans” section of the Self Lender website to see exactly what you’ll pay and what you’ll get with different plans.
Your Credit Builder Loan Goes Into a CD
That’s right; your money is secure when you use Self Lender. The account is held in a CD at one of the company’s banking partners. It’s held under your name, while you build your credit.
Furthermore, Self Lender takes their role seriously. They want your money to be safe. Therefore, they are an SSAE 16 SOC 1 compliant partner for a U.S. financial institution. In other words, your data is secure – or at least as secure as it would be with any other bank.
Is a Credit Builder Loan Right for You?
If you have already established excellent credit, you don’t need a credit builder loan. After all, you can get terrific loans and put your money in other investment opportunities that will work for you.
However, if you need to build up your credit history, a credit builder loan can help. According to recent data, there’s a major difference in loans for people with low/no credit compared to people who have established good credit. For example, with a 5-year $20,000 car loan, someone with low/no credit will end up paying about $5000 more for that same car.
If you want to make any big purchases in the future, you need to build up your credit history now. It saves you money in the long run. If you can delay a car purchase for one year, using a credit builder loan to improve your credit score in the meantime, you can save yourself thousands of dollars. Plus, you’ll have that big chunk of money coming out of the account to put down for your down payment.
If you need a loan immediately, a credit builder loan isn’t for you. But, if you can wait, it can be a smart tool for building your credit score and making a little extra money in the meantime.
1 Credit Builder Account — proceeds are held in a deposit account until maturity
All Credit Builder Accounts made by Lead Bank, Member FDIC, Equal Housing Lender, Sunrise Banks, N.A. Member FDIC, Equal Housing Lender or Atlantic Capital Bank, N.A. Member FDIC, Equal Housing Lender.
Subject to ID Verification.
Individual borrowers must be a U.S. Citizen or permanent resident and at least 18 years old. Valid bank account and Social Security Number are required.
All loans are subject to consumer report review and approval. Results are not guaranteed. Improvement in your credit score is dependent on your specific situation and financial behavior. Failure to make monthly minimum payments by the payment due date each month may result in delinquent payment reporting to credit bureaus which may negatively impact your credit score. This product will not remove negative credit history from your credit report.
All loans subject to approval. All Certificates of Deposit (CD) are deposited in Lead Banks, Member FDIC, Sunrise Banks, N.A., Member FDIC or Atlantic Capital Bank, N.A., Member FDIC.
2. Personal Loans – proceeds are available in as little as one business days. These optional offers are not a Lead Bank, product or service, nor does Lead Bank endorse this offer. These optional offers are not a Sunrise Banks, N.A. product or service, nor does Sunrise Banks endorse this offer. These optional offers are not an Atlantic Capital Bank, N.A. product or service, nor does Atlantic Capital Bank, N.A., endorse this offer.
We are an affiliate of Self Lender. Although this posting contains affiliate links, the review and opinions expressed below are my own.