Understanding The Concept Of Credit Builder Loans And How They Can Help In Improving Credit Scores

It is commonly understood that securing a loan can often be a struggle, particularly if the borrower has a poor credit score. In fact, people with poor credit ratings normally have a very tough time identifying a bank or banking institution who are willing to lend them the amount they need, when the lending institution accepts the loan application, they impose a high interest rate that can lead to further difficulties.

So what can an individual with poor credit score and history do? What happens if the borrower does not have a credit history at all? Because it is a very well known fact that it is very difficult to build one’s credit score when the lending institutions do not give out loans. For people stuck in this situation, they should know that there is something known as “credit builder loans”, this type of loan is made for individuals who do not have no credit history and also for individuals with poor credit history and scores. 

Credit Builder Loans

This unique type of loan is meant for people who have poor credit history or no credit history at all. 

When it comes to a credit builder loan, the lending institution holds the loan amount and it needs the borrower to make monthly payments, when the borrower makes his/her payments on time it helps in building their credit score and they can collect the loan when they have completely paid it off. 

Credit builder loans are known as “Fresh Start Loans” or “Starting Over Loans”.

One good thing about this loan is that there is no requirement of a good credit score if an individual wants to avail this loan, but with being said, the individual does need to have a good and steady income to make his monthly payments on time. Remember, the amount being borrowed will not be given to the borrower immediately but instead it will be held in the bank and the borrower will receive the amount once he has paid it off in its entirety. 

This loan has only one purpose, that is to improve an individual’s credit score. 

Credit Builder Loans: How Do They Work?

As mentioned above, credit builder loans have only one purpose and this is improving credit scores but that will only work when the borrower makes his payments on time without fail. Credit builder loans are usually offered by small lending institutions. When the loan application is approved the requested sum of money will be deposited into the lender’s bank account. 

After the amount is deposited in the lender’s bank account, the borrower has to start making his payments on time with the interest charged on the loan. These timely payments are reported to credit bureaus which is why making payments on time is a must because if the borrower fails to make payments on time, that too will be reported to the credit bureaus and that will result in the bringing down the borrower’s credit score. 

In the case where the borrower makes all his payments on time, that will result in the improvement of his/her credit score. 

Acquiring A Credit Builder Loan

Here are the steps that you have to follow if in order to obtain a credit builder loan

Finding Credit Builder Loans 

When a borrower is seeking out a credit builder loan, it is quite obvious that they come across several options but the wise thing to do is to choose a credit builder loan which is affordable. Going for something other than what can be afforded may result in further problems. 

Apply For The Loan

Once the terms and conditions of loaning and repayment is discussed and confirmed with the lender, only then will the loan be approved. Once that part is done,the lender approves the loan application he will transfer the loan amount to a bank account of his. 


Once the transfer has been made, it is now the borrower’s responsibility to make his payments with interest on time, only then will there be an improvement in his credit scores. If he fails to make even one payment on time then that will negatively affect his/her credit scores. 

Monitoring Credit Scores

Everytime a payment is made, checking one’s credit score is a good idea, it helps in keeping track of your score. There are several websites that show credit scores for absolutely no cost at all. 

Collecting The Loan

Once the borrower has made all of his payment on time, he can now collect his loan amount from the lender. Furthermore, the borrower will have a good credit score which will help in the future if he/she wants to take out any other type of loan like short term loans, business loans, payday loans, or any other type of unsecured loan. 

Advantages And Disadvantages Of Credit Builder Loans

Here are the advantages of credit builder loans

  • Credit builder loans makes the borrower save money in a bank account
  • They are extremely easy to apply and get. Credit builder loans are secured by the money the borrower requires.
  • Making monthly payments in order to obtain the loan also helps in creating and building a financial discipline.
  • Once the borrower makes all his payments on time, he will receive the loan amount and several lenders also refund a portion of the interest rate that is levied on the loan.

Every coin has two side, this means that there are a few disadvantages to credit builder loans as well, and they are:

  • These loans are not free, there is a one-time administration fee levied when anyone is obtaining a credit builder loan
  • If there is delay in payment, even one, it will negatively affect the borrowers credit score and bring it down. That is defeating the very purpose of credit builder loans.


Credit builder loans seem like the best option if people want to improve their credit score and without a doubt it is one of the best options, especially for individuals who have poor or no credit scores. But this will only work if they adhere to the rules and regulations (repayment terms). 

Greg Trim

John is a small business blogger with a focus on technology and innovation. With over 7 years of experience covering the latest trends in the small business world, John has a reputation for being a knowledgeable, forward-thinking and tech-savvy blogger. He has a keen understanding of the intersection between technology and small business, and is able to explain the latest tools and strategies in a clear, relatable and actionable way for his readers. John has interviewed industry experts and covered major technology events such as the Consumer Electronics Show and the SXSW Interactive conference. He is also an active small business owner and entrepreneur, which gives him a unique perspective on the challenges and opportunities facing small business owners in the digital age. His blog is known for providing valuable insights and tips on how to leverage technology to grow and scale a small business.