{"id":13474,"date":"2024-02-06T13:04:36","date_gmt":"2024-02-06T19:04:36","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=13474"},"modified":"2025-06-06T10:04:28","modified_gmt":"2025-06-06T16:04:28","slug":"what-is-a-credit-builder-loan","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/credit-101\/what-is-a-credit-builder-loan.html","title":{"rendered":"What is a credit builder loan?"},"content":{"rendered":"\n
\"Credit<\/figure>\n\n\n\n

A credit builder loan is a type of loan that helps you rebuild poor credit or establish credit for the first time.<\/p>\n\n\n\n

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law\u2019s editorial disclosure for more information<\/a>.<\/em><\/p>\n\n\n\n

A credit builder loan is a type of loan that helps you rebuild poor credit<\/a> or establish credit for the first time. Its sole purpose is to help you improve your credit, and having good credit\u2014or even any credit at all\u2014isn\u2019t required to apply for one.<\/p>\n\n\n\n

Taking out a credit builder loan means borrowing a specific sum of money you can\u2019t access right away. Instead, the funds get deposited into a savings account that gets set aside until your loan term ends and you\u2019ve made all of your payments.<\/p>\n\n\n\n

How does a credit builder loan work?<\/h2>\n\n\n\n

A credit builder loan functions in the opposite way of a traditional loan, which gives you immediate access to funds that you repay later.<\/p>\n\n\n\n

With a credit builder loan, you make monthly payments toward your borrowed money, which is set aside in a secured savings account. This allows you to make consistent, on-time payments on the loan that will show up on your credit report, which will likely improve your credit. Once you\u2019ve fully repaid the loan, the lender will give you access to the funds.<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

How to improve your credit with a credit builder loan<\/h2>\n\n\n\n

If you make your payments on time for the duration of the loan, you show that you\u2019re a reliable borrower. This is reflected on your credit report, which is what your credit score is based on.<\/p>\n\n\n\n

Since this isn\u2019t a traditional loan, making your payments early won\u2019t have any advantages over just paying your monthly balance on the agreed-upon schedule. But by following these steps, you can use credit-building loans to increase or establish your credit rating.<\/p>\n\n\n\n

1. Assess your average monthly expenses<\/h3>\n\n\n\n

Before you take out a credit builder loan, it should be helpful to take stock of your recurring bills and compare them to your income. Check past billing statements, add up your recurring bills and estimate monthly living expenses like groceries and gas. Compare this to your monthly income to see how much you can realistically spare for loan repayments.<\/p>\n\n\n\n

2. Choose a realistic loan amount<\/h3>\n\n\n\n

Using the budget you came up with in step one above, select a loan amount with monthly payments you\u2019re confident you can afford. Remember, playing it safe with a smaller amount is usually better.<\/p>\n\n\n\n

3. Follow your payment plan<\/h3>\n\n\n\n

Just as paying back a credit builder loan can help your credit, failing to make payments will hurt it\u2014and so will getting into more debt with a budget stretched too thin. Prioritize on-time loan repayments so you don\u2019t get penalized.<\/p>\n\n\n\n

4. Monitor your credit<\/h3>\n\n\n\n

Periodically check your credit<\/a> and monitor the general trajectory. Aim to check it once a month, and remember that It\u2019s normal for your credit score to fluctuate, so don\u2019t worry if you see it temporarily drop a few points. Keep in mind that it may take several months after you take out a credit builder loan to see positive growth.<\/p>\n\n\n\n

5. Develop a long-term financial plan<\/h3>\n\n\n\n

Once you receive your proceeds at the end of your repayment term, you can use that money to establish a long-term plan. Consider putting that money into a rainy day fund<\/a> in case an emergency arises. That way, you have a buffer to stay out of debt or pay bills on time to continue building your credit.<\/p>\n\n\n\n

How to get a credit builder loan<\/h2>\n\n\n\n

Ready to take out a line of credit for bad credit repair or credit establishment? Follow these steps to apply for a credit builder loan.<\/p>\n\n\n\n