Credit Builder Loan vs Personal Loan (Explained)

If you’re just starting to build your credit, you may have come across a product known as a credit builder loan. We will explain what a credit builder loan is as well as the difference between a credit builder loan vs a personal loan in much detail below.

Credit Builder Loan vs Personal

A credit builder loan is a loan that’s designed to increase your credit score. With a regular personal loan, you apply for the loan and if you’re approved, the lender will deposit funds directly into your account before you make a single payment. With a credit builder loan, the process is a little different because before you’re given money, you must make installment payments to the lender (this includes payment of interest), and the payments are deposited into a savings account.

These payments are reported to the credit reporting bureaus, boosting your credit score. After you’ve completed making installed payments to the lender, your funds will be dispersed to you.

With a personal loan, on the other hand, you’re given the money upfront after you’re approved for the personal loan, and then you are responsible for paying back the money that you borrowed.

That said, not everyone who applies for a personal loan is approved for one, so for someone who wants to build credit but cannot get a personal loan, a credit builder loan is appropriate and will help you build credit.

Obtaining a credit builder loan is much easier than obtaining a personal loan because lenders are taking less of a risk since you’re paying them the money that you want to borrow before they will lend it back to you.

How to Get a Personal Loan vs a Credit Builder Loan?

You can find personal loans at almost every bank there is in the United States. To get a personal loan you must have good credit because your lender will rely heavily on your creditworthiness. The better your credit score, the higher the loan amount you will qualify for and the better the interest on your loan.

For example, a person with a 760 credit score or higher may qualify for a $20,000 personal loan at 10% interest rate, while a person with a 680 credit score will only qualify for a $13,000 personal loan at an 18% interest rate. The lower your credit score, the more interest you will be paying. Although an 8% difference rate may not seem like much at first sight, it will make a big difference on the amount you will end up paying back.

That said, obtaining credit builders loans are not as readily available as are personal loans. To find a credit builder loan, you will usually have to visit a credit union or look for an online credit builder loan provider. That said, before you choose an online credit builder loan, you will benefit greatly from reading some of the reviews for the bank before applying for the loan.

Once you have found a credit builder loan provider, you will apply for a credit builder loan in the same way you would apply for a personal. That is, you will need to provide the following personal information to the lender: name, address, date of birth, social security number, employment status, and your bank account information.

If you’re approved for the loan, you may have to pay a small fee for the lender to setup your loan. After that, you’ll make payments on the loan, and after you’ve completed the payments, the funds will be dispersed to you.

On the other hand, when you apply for a personal loan, the funds are first dispersed to you, and after that, you begin making payments on the loan. That said, the application process for a credit builder loan is similar to that of a personal loan.

Process For Obtaining a Credit Builder Loan vs Personal Loan

We will explain the difference between the process for obtaining a personal loan vs obtaining a credit builder loan.

Credit Builder Loan

  • Submit an application for a credit builder loan
  • If approved, a savings account is opened by your bank
  • You make payments to your lender
  • Payments are deposited into a savings account
  • Your payments include the payment of interest
  • The lender reports the payments to the credit bureaus
  • Once you’ve finished making payments on your loan, you will receive the funds

Personal Loan

  • Submit an application for a personal loan
  • If approved, the funds will be deposited into an account of your choice
  • You make payments + interest to your lender
  • Once you’ve paid off the loan, your loan installment account is closed

Pros & Cons of Credit Builder Loans

Here are some of the advantages and disadvantages of credit builder loans:

Pros (Advantages)

  • Your are not required to have a good credit score
  • Low interest rates when compared to other personal loans
  • No hard inquiry when you apply for a credit builder loan
  • No security deposit to obtain a credit builder loan
  • Helps build good credit

Cons (Disadvantages)

  • Payments are reported to the credit bureaus, so if you miss payments, this will lower your credit score
  • Credit builder loans come with hefty fees
  • You will have to pay interest even though you’re pre-paying the loan before funds are dispersed to you

Alternatives to Personal Loans and Credit Builder Loans

The best alternative to taking out a personal loan or credit-builder is to apply for and obtains a secured credit card. Security credit cards are great for someone who is just starting to build his credit or someone who wants to improve his bad credit.

Secured credit cards work the same way as do regular credit cards, the only difference is that to obtain a secured card, you must place a security deposit with the card issuer in order to obtain the card. Your security deposit usually determines your credit limit.

For example, if you pay a $700 security deposit, you will be given a credit card with a $700 credit limit. The card issuer will usually keep your security deposit for 12 months. The card issuer will periodically review your credit card account.

If the card issuer sees that you’ve been making your payments in full and on time, the card issuer may return your security deposit to you and convert your secured credit card into a regular unsecured credit card.

If the card issuer converts your credit card into a regular card, it will return your security deposit to you.

As far as how a secured credit card works, it work’s exactly the same way as does a regular credit card. In fact, merchants and others will not know that you’re using a secured credit card.

Also, a secured credit card will help your credit just as would a regular credit card. This is so because your payment history is reported to the credit reporting bureaus as your payments would be with a regular card.

So, if you need to build credit, you should strongly consider applying for a secured credit card instead of taking out a credit builder loan.

Credit Score Planet Frequently Asked Questions (FAQs)

1. Do you need good credit to get a credit builder loan?

No, you do not need to have good credit to get a credit builder loan. This is so because credit builder loans are designed for persons who have bad credit or are just starting to build their credit. Credit builder loans are different from personal loan where a person must have excellent credit to be approved for the loan.

2. Are credit builder loans good?

If you want to build good credit quickly, credit builder loans are a great way to do so. That said, you should consider opening a secured credit card as they are a great alternative to credit builder loans.

3. What is a credit builder loan?

With a credit builder loan, you will make payments to your lender, your lender will place the amount into a savings account, as you make payments, your payments are reported to the credit bureaus. Once you’ve finished making the payments, the loan provider will disperse the funds to you.

4. Can I get a credit builder loan if I have no credit?

Yes, you may be able to get a credit builder loan even if you do not have credit. This is so because credit builder loans are designed to assist consumers with building credit from scratch or rebuilding your bad credit.