How Credit-Builder Loans Work (and When They Make Sense)

Disclosure: Some links are sponsored. We may earn a commission if you apply through them and are approved, at no extra cost to you. This is general information, not financial advice.

Not financial advice: this is general education. Your situation is different, so read every product's full terms and consider free help from a nonprofit credit counselor before taking on new credit.

How it works

With a credit-builder loan, the lender doesn't hand you the money up front. It holds the loan amount in a locked savings account or certificate of deposit while you make fixed monthly payments. Your payments are reported to the credit bureaus. When you've paid it off, you get the money, sometimes with the interest it earned, minus any interest and fees you paid.

Where to find one

Credit unions and community banks often offer them, as do some online lenders and apps. Credit unions are worth checking first, since their rates and fees are often low.

Pros

Adds an installment loan to your history, which can help your credit mix.
Forces savings: you end with a lump sum.
The lender carries little risk, so approval is usually easier than for a regular loan.

Cons

You pay interest and sometimes fees to borrow your own money.
Late or missed payments are reported too, and can hurt your credit.
You can't use the money until the end, so it's no help in an emergency.

Before you sign

Confirm it reports to all three bureaus.
Pick a payment you can make every month without strain.
Ask about fees for early payoff or closing the account.

More from the CFPB on ways to start or rebuild credit. A 2020 CFPB study found these loans helped people with no existing debt build credit, while people already carrying debt sometimes struggled with the extra payment.

More guides

← Back to the main guide