Disclaimer: This article is for general educational purposes only and is not intended to imply that Citi offers the product or product features discussed herein. Citi may have different product offerings and/or eligibility criteria than those mentioned in this article.
Key insights:
- A credit builder loan holds your borrowed funds in a savings account until you’ve made all your payments
- Community banks, local credit unions and online lenders are common sources for this type of loan. Citi does not offer these loans.
- On-time payments can help establish a positive payment history, while missed payments may hurt your credit
- Secured loans, secured cards and becoming an authorized user are alternative paths to building credit
Are you renting your first apartment, but don’t have a credit history to show your landlord? Or maybe you’re hoping to finance a car, but your credit score isn’t where it needs to be. Whether starting from scratch or recovering from a rocky financial past, qualifying for everyday credit options can feel out of reach. In that case, a credit builder loan could help.
A credit builder loan is an installment loan designed specifically to help people establish a track record of on-time payments, which can strengthen their creditworthiness over time. Read on to learn how these loans work, where to find one and a few alternatives worth considering along the way.
How does a credit builder loan work?
A credit builder loan flips the usual borrowing process. Instead of receiving your funds upfront, the lender holds the approved amount in a savings account or certificate of deposit (CD) while you make fixed monthly payments to repay the loan. Once you’ve paid off the full balance, plus interest, the funds become available to you.
This is the opposite of how a traditional loan works, where you get a lump sum right away and pay it back over time. With a credit builder loan, your money stays put with the lender until the very end. It also may not require a hard credit check.
Making consistent, on-time payments throughout the loan term can help you build a positive payment history, a factor that plays a significant role in your overall creditworthiness. Because the lender holds your funds as a form of collateral, credit builder loans also tend to be easier to qualify for than other loans, which makes them a practical option if you have little to no credit history.
Where to find credit builder loans
You can generally find loans to build credit through a few different types of lenders, including:
- Community banks: These locally owned institutions may offer credit-builder loans to customers in their service areas
- Local credit unions: Credit unions may offer these loans to members, though you’ll typically need to join the credit union first
- Online lenders: Some online lenders and fintech companies specialize in credit builder loans, though availability can vary by state
Each option comes with its own application process and requirements, so it’s worth exploring more than one before deciding.
How to get a credit builder loan in 5 steps
If a credit builder loan sounds like the right fit, the following steps and tips can help you move through the process with confidence.
1. Review and compare lenders
As with any loan, it’s wise to compare offers and interest rates from a few different lenders before committing. Some lenders let you, which gives you a sense of your potential loan amount and rate without a full application. It’s also worth asking your current bank whether they offer credit builder loans, since this option isn’t always advertised.
2. Check your budget
Before you apply for a loan, it’s a good idea to confirm what kind of monthly payment you can afford. Take a close look at your income and expenses to make sure a new payment fits comfortably into your budget.
3. Gather necessary information
Lenders generally ask for a few pieces of personal information before approving an application. Be ready to provide the following:
- Proof of income
- Identification, such as a government-issued ID
- Address and contact information
- Banking information
4. Complete the application
Many lenders let you apply online through their website, though you can typically also apply in person at a local branch, if there is one. Read through the terms and fees carefully and review your application before submitting it to make sure everything’s accurate.
5. Make your monthly payments
Once you’re approved and accept the loan offer, you’ll begin making fixed monthly payments for the loan term. This is how you build a positive payment history, so setting reminders or autopay to make sure you don’t miss due dates can help you stay on track.
Pros and cons of credit builder loans
Credit builder loans come with real advantages, but it’s worth weighing the potential drawbacks before you apply.
Benefits
- Typically easy to qualify for: These loans are designed for people with little to no credit history
- Can help develop healthy financial habits: You’ll make fixed monthly payments over the loan term, which builds consistency
- Helps establish or improve credit: It’s a strategic way to build a positive payment history over time
Considerations
- Fees and interest are usually added on: Your monthly payments typically cover interest and fees in addition to the principal
- Delayed access to funds: You won’t be able to use the loan amount until you’ve repaid it in full
- Impact on credit: Missed payments can negatively affect your credit history, working against your original goal
Alternatives to a credit builder loan
If you’re still weighing your options, or if the amount you qualify for isn’t as much as you want to borrow, other paths can help you build credit while giving you more flexible access to funds.
Secured loans
A secured loan is backed by collateral, such as a vehicle, which reduces the lender’s risk when lending to you. Because of that added security, secured loans may be easier to qualify for and can come with more favorable rates than unsecured options, all while helping you build a payment history.
Secured credit cards
A secured credit card requires a cash security deposit that typically equals your credit limit. You use the card like a normal credit card, and if you pay your bill on time each month, the issuer may report that positive history to the credit bureaus, helping strengthen your creditworthiness.
Becoming an authorized user on a credit card
An authorized user is someone added to another person’s credit card account who can use the card without being responsible for payments. Becoming an authorized user can help build your credit if the primary cardmember manages the account responsibly and the issuer reports authorized-user activity to the credit bureaus. You’ll typically need to ask the primary cardmember to add you directly through their card issuer.
Build your credit for a stronger financial future
Credit builder loans can be a helpful way to improve your eligibility for other kinds of loans in the future. Although Citi does not offer credit builder loans, it offers a range of lending options that may help you achieve your goals.
For example, if you’re consolidating debt, covering a home improvement project or planning for another major expense, a personal loan from Citi could help you cover the cost, with additional perks for Citibank accountholders. Explore Citi® Personal Loan options today to get started.
Credit builder loan FAQs
How much can I borrow with a credit builder loan?
Credit builder loans typically range from $300 to $1,000, though amounts can vary by lender. Because the funds are held until you’ve fully repaid the loan, lenders may be more flexible with approval amounts than they would be with a traditional loan.
What happens if I miss a payment on a credit builder loan?
A missed payment could be reported to the credit bureaus and negatively affect your creditworthiness, potentially making it harder to qualify for credit in the future. It’s important to contact your lender if you think you might miss a payment to explore possible solutions.
Is a credit builder loan guaranteed to build my credit?
They could help, especially if you have little credit history and can commit to on-time payments each month. However, results depend on the lender reporting your payments to credit reporting agencies. If you already carry other debt, the impact on your credit history may be smaller.
This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
