Best Credit-Builder Loans – Help Establishing Credit
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This may sound weird, but a loan where you get the money after you’ve paid off the loan is one way to join the world of credit if you don’t have a credit card or credit history.
Money from a loan is typically given to borrowers when the loan starts. Credit-builder loans, on the other hand, give borrowers their loan proceeds after they’ve paid off in about one year, though some loans can last as long as 10 years.
Credit-builder loans are designed to help people establish a credit score and to help those with lower scores improve their repayment histories and raise their scores when they consistently make on-time payments and eventually pay off the loan.
Borrowers make payments before receiving the loan funds. The lender moves funds into a locked savings account that the borrower can access when the loan is fully repaid. The monthly payments are reported to the three major credit bureaus: Equifax, TransUnion, and Experian.
The lender usually charges interest and fees.
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Overview of the best credit-builder loans
Credit-builder loan company | Best for |
|---|---|
Low cost | |
MoneyLion | Access some loan funds upfront |
CreditStrong | Picking the loan you want |
Digital Federal Credit Union | Low interest rate |
Self | Low cost for short term |
Banks compete, you enjoy low rates
- APR: 6.99% - 35.99%
- Loan Term: 12-144 months
- Credit Score: Poor, Fair, Good, Excellent
Best credit-builder loans
Brigit
Brigit doesn’t charge interest on credit-builder loans, but it does charge a monthly membership fee of $9.99, meaning you could pay almost $120 to borrow $600 in one year. You’re essentially paying yourself monthly loan payments, though the monthly fee goes straight to Brigit.
The loan starts with Brigit depositing your installment loan amount into a savings account at Coastal Community Bank. You choose how much you want to pay toward the monthly loan, from $1 to $50. The difference between the amount you pay and the due amount comes from the $600 loan in the locked deposit account.
Because no interest is charged, it’s a forced savings account with a monthly fee.
Brigit claims it can help people raise their credit score by up to 60 points through its Credit Builder program.
That increase matches what the Consumer Financial Protection Bureau found in a report it issued in 2020, but only among those who didn’t already have existing debt. Borrowers who already had debt before taking on a credit -builder loan only saw their credit scores rise about three points, compared to a 60-point rise for people who didn’t have other debts.
- Cost: $9.99 monthly fee
- Where to find: Brigit
Get cash – with no credit check or late fees
- Approval in minutes.
- No credit check.
- No late fees.
- Avoid overdrafts and worry less
With Express Delivery, you can get your cash in minutes, for a small fee. If you’re not in a rush, you’ll get it in 2-3 business days and it’s always free.
MoneyLion
The Credit Builder Plus program at MoneyLion includes a unique credit building service by immediately giving customers part of the loan funds instead of requiring them to wait six months or longer to get the money from their credit-builder account at the end of the loan.
The company’s website doesn’t say how much money customers can immediately withdraw from a credit-builder loan. MoneyLion determines the maximum amount to be taken out after a loan is approved.
Whatever amount you get upfront is subtracted from the loan amount. The money left will be deposited into what MoneyLion calls a Credit Reserve Account, which the FDIC doesn’t insure. You’ll get access to the account when you pay off the loan. If you default on the loan, the reserve account will be used to pay off the loan balance.
In addition to the $19.99 monthly fee, MoneyLion requires that the principal payment and interest due be paid monthly.
- Cost: $19.99 monthly fee, interest rate from 5.99% to 29.99% APR.
- Where to find: MoneyLion
CreditStrong
CreditStrong offers a few credit-builder accounts, but the Instal program is best for people who want to rebuild or raise a poor credit score without taking on a large loan. The loan is locked in a savings account until it’s paid off.
But unlike other financial products for building credit where you apply and the lender tells you how much of a loan you qualify for, CreditStrong lets you pick from five accounts. They vary by loan amount and term, but the biggest feature is the monthly fee, which includes principal and interest.
Here are the five Intel plans. Each has a one-time administrative fee of $15. Accounts can be partially prepaid or paid off early, allowing users to close accounts anytime without a fee or penalty.
Monthly cost | Loan amount | Loan length | APR % |
|---|---|---|---|
$15 | $1,000 | 10 years | 13.50% |
$30 | $2,500 | 10 years | 7.75% |
$38 | $1,100 | 3 years | 15.73% |
$48 | $1,000 | 2 years | 15.51% |
$96 | $2,000 | 2 years | 14.74% |
Making a $15 monthly payment for 10 years to get $1,000 to keep eventually is a long-term commitment you may not be thrilled to take on, no matter how much it improves your credit score. And do you need to spend 10 years improving your credit history this way?
First, consider the approximately $770 in interest you’ll pay to get $1,000 in 10 years. That’s a lot of interest to pay. You can pay off the loan quicker with bigger payments but still pay 13.50% interest.
CreditStrong points out that credit history is 15% of a FICO Score. Paying off a loan in one year and then replacing it with another one-year loan may cause your credit score to dip each year, and every time the loan matures, it will decrease the length of your credit history. Instead, it’s trying to sell you a much longer loan with a low monthly payment that looks manageable.
- Cost: 7.75% to 15.73% APR, and $15 one-time fee.
- Where to find: CreditStrong
- Where accessible: Not available in Vermont and Wisconsin.
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Digital Federal Credit Union
Massachusetts residents are the most likely customers for credit-builder loans through Digital Federal Credit Union, based in Marlborough, Massachusetts.
The low 5% interest rate is appealing, and with loan terms of only one to two years, you’ll have the principal in your hands relatively quickly while building your credit score with on-time payments.
With only two years or less to repay a loan, the estimated monthly payment may seem high at $43.87 per $1,000 borrowed. A $3,000 loan over two years requires a monthly payment of $132. The credit union’s website calculates how much you can afford to borrow based on the monthly payments you say you can afford.
Digital Federal Credit Union, or DCU, is a not-for-profit cooperative owned and operated by its members. To join, you must have something in common with other members, such as:
- Familial relation
- Employment at a company it does business with
- Membership in an association
- Residence in a particular geographic area. It serves Massachusetts and New Hampshire with branches and ATMs.
- Cost: 5% APR
- Where to find: Digital Federal Credit Union
- Where accessible: Massachusetts and New Hampshire
Self
Like CreditStrong, the credit-builder company Self allows customers to pick from several set loans. Self offers four payment amounts, but they’re all for one or two years, compared to loans of up to 10 years at CreditStrong. The cheapest loan at Self costs $46 in fees and interest.
Each loan includes a one-time administrative fee of $9. You can cancel a loan at any time and get the money you paid into savings back, minus interest and fees. The administrative fee is non-refundable. Here are the four options at Self:
Account name | Term | Monthly Payment | Total payments | Get back | Final cost | APR |
|---|---|---|---|---|---|---|
Small Builder | 2 yrs | $25 | $600 | $520 | $89 | 15.92% |
Medium Builder | 2 yrs | $35 | $840 | $724 | $125 | 15.97% |
Large Builder | 1 yr | $48 | $576 | $539 | $46 | 15.65% |
X-Large Builder | 1 yr | $150 | $1,800 | $1,663 | $146 | 15.91% |
Like the other financial technology companies we reviewed, Self doesn’t do a hard inquiry for a credit check, which can lower a credit score. Self-reports to the three major credit bureaus.
Autopay is required so users can stay on track with on-time payments and not worry about due dates. Self lets customers track their credit score for free to see how it changes over time.
- Cost: APR from 15.64% to 15.97%, and one-time, nonrefundable administrative fee of $9.
- Where to find: Self
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Summary of best credit-builder loans
Company | Loan | Term | Fees | Interest rate | Reports to all 3 credit bureaus |
|---|---|---|---|---|---|
$600 | 1-2 years | $9.99/month | None | Yes | |
MoneyLion | Up to $1,000 | 1 year | $19.99/month | 5.99% to 29.99% APR | Yes |
CreditStrong | $1,000 to $2,500 | 2-10 years | $15 once | 7.75% to 15.73% APR | Yes |
Digital Federal Credit Union | $500 to $3,000 | 1-2 years | None | Max is 18% | Yes |
Self | $520 to $1,663 | 1-2 years | $9 once | 15.65% to 15.97% | Yes |
FAQs
Am I better off with a secured credit card?
Yes. Secured credit cards require a security deposit that’s equal to your credit line limit. High interest rates can also be charged on secured credit cards, but if you have a low credit line then payments can be easier to manage. On-time payments are reported to the credit bureaus.
How long should I have a credit builder loan for?
Some online lenders say customers see their scores rise within two months, and may even see their credit scores go up in a few weeks. To get the most out of a credit builder loan, you may want to use it for at least one year. The average credit score recovery time for a late mortgage payment is nine months, so if you’ve paid a few bills late then a one-year loan with on-time payments should help a score recover. Paying your mortgage on time after a late payment should help too.
Will my score rise if I already have other debts?
Not by much, according to a federal report on credit builder loans. Borrowers who already had debt saw their credit scores rise only three points, according to the Consumer Financial Protection Bureau. Those who didn’t have other debts and then took on a credit builder loan saw their scores go up 60 points. It’s apparently easier to pay off one debt instead of a few if your goal is to raise your credit score.
Why you should use credit-builder loans
The main reason to build credit-builder loans is to do as the name implies: build your credit. Whether you have no credit history, have just started to build one, or have bad credit and want to improve it, these personal loans are unsecured loans that can help you achieve a good credit score.
Related: Best Credit-Building Credit Cards
Why you shouldn’t use credit-builder loans
These installment loans usually come with fees or interest rates, often both, and can be expensive to build your credit. You may want to try other methods, such as getting a secured credit card or becoming an authorized user of someone’s credit card. The easiest way to build a positive payment history is to pay your bills on time.
The loans are often set up by fintech companies, who aren’t lenders but work with banks to provide the loan amount. You may find better loan terms at community banks or other financial institutions that offer more traditional loans and other financial services.
Credit-builder loans can help you build savings, but that shouldn’t be your main goal. Paying interest on a loan for a year or longer isn’t the best way to contribute to a savings account.
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The bottom line
Building a positive credit history is an important part of a credit score, and credit-builder loans can help. These installment loans, however, may be best after you’ve tried other ways to improve your credit score or establish credit.
Paying interest as high as almost 30% on a loan you may not need seems like an odd way to raise a credit score, but on-time payments on the loan will be reported to the three major credit bureaus, and your credit score should improve. Still, paying interest on a forced savings account can be an expensive way to build credit.
But if you know the costs and are willing to pay them to improve your credit history, a credit-builder loan may be your solution.
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Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
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