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How Do Credit Builder Loans (aka Credit Repair Loans) Work?

Written by Jessica Steer
From getting approved for a small loan to applying for a mortgage, having good credit makes life a whole lot easier. But what do you do when you have bad credit, poor credit, or no credit score at all? If you’re in this situation, it might seem like there’s nothing you can do, but rest assured that’s not the case. One straightforward option is to take out a credit builder loan, a tool that’s specifically designed to help boost your credit score.
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    It doesn’t take much to fall into the “bad credit” credit camp. Maybe you suffered a financial crisis that caused you to lapse on loan payments for a long period of time. Maybe you were trying your best to make ends meet and had a few setbacks. Or maybe you’re someone who’s simply never had a credit card or secured loan, and now you find yourself with no credit score at all.

    No matter how you found yourself in a position with a poor credit history, it can make some things particularly difficult, and not just getting approved for a loan either. Even trying to rent an apartment can become stressful, as many landlords and property management companies require a credit check for applicants.

    Having good credit, on the other hand, makes it comparatively easy to breeze through financial applications and approvals, such as financing a car, taking out a line of credit, or getting approved for a mortgage.

    So, how do you get out of the bad credit camp, where you can’t get a loan because you have poor credit, and you can’t build your credit because you can’t get a loan?

    One of the most effective options you can take advantage of is a credit builder loan. With a credit builder loan, you can boost your credit on your own terms and start taking back control of your financial future.

    What is a credit builder loan?

    A credit builder loan (also known as a secured savings loan or credit repair loan) is an unusual type of loan. Why? For starters, it does not require good credit for approval. The reason for this is simple. Credit builder loans are designed for one thing and one thing only: to help you improve your credit score and get your foot in the door of borrowing and making repayments.

    When you take out a credit builder loan, you don’t actually get any of the money you’re borrowing upfront. Instead, the lender keeps the amount you borrowed in a bank account and you pay the loan amount off with regular payments. Only once the loan is paid off in full does the lender release the money to you.

    Most importantly, as you make payments toward the loan amount, the lender reports your activity to the two major credit bureaus in Canada—Equifax and TransUnion. On-time payments are considered the single-most-important factor in determining your credit score, so as long as you’re making on-time payments for your credit builder loan you’re improving your score payment by payment.

    What are the requirements to get a credit builder loan?

    Because they don’t require good credit for approval, credit builder loans are an effective option for anyone looking to improve their credit history. You may have to satisfy some additional requirements, however, and these may vary slightly from lender to lender.

    The main requirement most lenders will look for is an assurance that you have enough income to consistently make on-time payments, so you may need to provide proof of employment and some recent paystubs.

    It’s important to note that your loan payments will also include the interest the lender is charging you on the loan amount. However, many lenders place credit builder loan payments into interest-bearing savings accounts, and release the interest gained to you with the rest of the loan amount once you’ve paid it off in full.

    What to look for in a credit builder loan

    With a credit builder loan, you don’t get access to funds until the loan is repaid in full. It's important to remember that the main goal of a credit builder loan is to rebuild your credit. To achieve this goal, all of your minimum payments need to be made on time and in full. So choose a small loan amount that ensures your payments are reasonable and achievable.

    Beyond this, you’ll want to take time to learn the specifics of the credit builder program you’re considering. What’s the interest rate, and how much interest will you end up paying over loan term? How long is the term of the loan? How long will it take you to pay off?

    Critically, make sure your lender will be reporting your on-time payments to the two major credit bureaus in Canada—Equifax and TransUnion.

    Check your credit score

    Before applying for a credit builder loan, you should check your credit score to see what kind of shape it’s in. Even if you know or suspect you have a poor score, it helps to know what you’re dealing with. Knowing your exact score upfront also helps you monitor your progress over time as you repay the loan. 

    There are a few ways to check your credit score in Canada, including several free options. 

    Reviewing your credit score will also give you some insight into what lenders will see when you seek approval for a loan, even a credit builder loan. Your credit score will impact the amount you’ll qualify for as well as the interest rate you’ll pay. 

    Start building credit again

    Many traditional financial institutions, such as banks and credit unions, offer credit builder loans, but not all. Typically, these institutions are also more stringent in their requirements for loans, even credit builder loans. 

    That’s why online lenders are becoming an increasingly popular option, especially for anyone looking to rebuild their credit. Online lenders offer convenience and speed while giving you an easier ability to shop around with a few clicks of your mouse. 

    Regardless of your credit situation, Spring Financial makes it easy to get approved for their signature credit-building product — The Foundation. Instead of a loan, think of The Foundation more like a subscription service or online program that offers a simple path to good credit. You can apply for The Foundation in under five minutes and we'll have you set up to build credit in no time!

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