Everything You Need to Know about Credit Builder Loan

Credit Builder Loans are generally given for a period ranging from six to twenty-four months.

The loans have to be repaid by in 12 monthly installments. These funds are held in the bank account so you cannot see them and hence cannot spend them while you are paying monthly installments. However, when these loans are cleared off, you receive the money.

How do these loans assist you?

These loans are also known as ‘Fresh Start Loans’, ‘Share secured loans’ or ‘Starting over Loans’. That is because these loans assist individuals who have never taken credit i.e. who possess no credit history or are attempting to rebuild from their mistakes. These loans support you to develop a record of reliable financial performance.

When we analyze loans from the perspective of a credit supplier, it becomes obvious that lenders are extra careful while lending money given how it is risky. They prefer to lend money to those people who they think will repay it back in time. These are people with a solid credit history. However, a person does not necessarily require a great credit history to get approved for a credit builder loans.

Lenders tend to trust you with their finance provided you have a decent credit history. Credit Builder loans help solve this problem for the lender and you alike.

  • This is because lenders can provide you with a loan without having to jeopardize their financial safety with the assumption that you will not repay them.

  • They also help you create credit and save money at the same time.

Who affords you these such loans?

Credit builder loans are usually granted by financial organizations that operate on a small scale, such as small banks and credit unions. These loans are not marketed enough like other loans are and therefore, are not very well known. There are a few lenders that provide this facility online. However, they require a fee for registration.

How do these loans work?

The loan amount that you borrow is kept in a bank account while you make payments in installments. The lender does not give you access to the money you have agreed to borrow until you clear the loan amount. There is no risk involved because they are the ones controlling the funds. Due to this financial safety net, lenders are more open to providing these types of loans to people with no credit history or poor credit.

Once you are eligible and confirmed for such a loan, the credit suppliers give a detailed account of your payment history to the CRA’s. This creates a credit history of timely payments for you which ultimately improve credit score uk.

How do you acquire this loan?

  • Choose the right financial institution

As mentioned above, small scale financial institutions are more willing to provide credit builder loans in the UK. Apart from these small co-operative banks and credit unions, there are a few lenders that provide the same facility online.

  • Select the loan amount

The next step is to make a decision regarding the loan amount in accordance with your personal needs. If you have a financial crunch, it would be advisable to choose a small loan amount that has affordable monthly installments. Usually, the loan amount ranges from £300 and £1,000. The size of the loan is not nearly as important to consider as the question of whether you will be able to return it on time. It is essential to know the terms of the credit builder loan completely before going ahead with it.

  • Comparison of key aspects between different lenders

The interest rate, the lender’s system that decides whether or not you will get the interest that has accumulated, and the expenses you will pay play critical roles in availing a credit builder loan. APR i.e. Annual Percentage Rate is another key aspect. Generally, lenders charge less than 10%. You must compare each of these aspects with different lenders in order to decide on the lender that suits you the best in terms of your needs, without having to burn a hole in your pocket.

  • Loan application:

The last step in the process is the loan application. The application is very simple and straightforward because you are only required to provide your general details. The information that you will have to provide for the application for a credit builder loan includes the following:

  • Personal details

  • Pre-tax monthly earning

  • Information about employment

  • References

  • Saving account balances etc

The advantage here is that unlike other loans, a credit builder loan will not reject you for having a bad credit history.

Effect of Credit builder loan on Credit score/Credit rating

The way in which you use a credit builder loan determines if it will develop your credit rating. If you make it a point to make timely payments in installments, it will work in your favor and assist you in establishing a solid credit history. You will have to present yourself as a person who can be trustworthy and responsible for financial matters such as credit handling. However, if you miss a payment, the same will reflect in your credit rating. If you do not have a mature credit history, it will significantly bring down your credit rating.

Therefore, credit builder loans prove to be beneficial to the customers as well and lenders alike who do not have to take on the burden of having to deal with other loans that come with risks.

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