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Last updated on 30th of March 2022

What is a Credit Builder Loan?

A credit builder loan helps to rebuild your creditworthiness and is ideal for those with a limited credit history or poor credit score.
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A credit builder loan helps to rebuild your creditworthiness and is ideal for those with a limited credit history or poor credit score. These loans have fixed monthly payments that help build up a borrower’s credit score, providing the loan is repaid in full.

By October 2020, the average total debt per household in the U.K. was £60,580 and the average credit card debt was £2,177.

Many lenders won’t consider people with low credit scores or limited credit history as they are seen as being a greater risk than people with a good credit score. This is mainly due to there being no history or evidence of loans being paid off on time and in full.

This is where credit builder loans can be very helpful to these types of consumers. 

Credit builder loans are designed to help people with poor credit scores, or a limited credit history, improve their scores by showing that they can manage their finances and repay a loan in full. If you need to borrow money in the future, you may also have access to better rates. 

Credit builder loans typically don’t offer large amounts of money. On average, the amount you can vary usually range between £500 and £5,000 over a period of 12 months or more. The loan amount and loan rate will vary between lenders. 

Banks typically don’t offer credit builder loans but there are many online loan providers and credit unions in the U.K. that do.  It’s important to keep in mind that you may not be eligible for a loan from one of these institutions - this is why it’s best to look at the requirements before applying for a credit builder loan.

How do credit builder loans work?

Credit builders do not work in the same way as conventional personal loans. If you apply for a credit builder loan, you agree to borrow a set amount of money and repay it in monthly instalments, but you will not be able to access the funds until the loan is paid back to you at the end of the term.

Not all credit builder loans work in the same way, so it’s important to check with the provider.

Keep the following aspects in mind when considering a credit builder loan:

  • Affordability. It is important to make sure you can afford a credit builder loan. Credit providers will check your income and employment status as part of your application.

  • Payments. As with most other loans, if you miss a payment the lender will report it to the credit reference agencies, which may further damage your credit score.

When you get a credit builder loan, you agree to an amount that you can comfortably afford every month - it could be £10 or £100, or more. Whatever amount you settle on, you’ll commit to paying this every month for at least a year (12 months).

As an example, say you’ve committed to £30 per month, the lender will lock away £360 on your behalf. Every month, your payment goes towards this amount and your payment history gets reported to the credit reference agencies. 

If you keep these payments up consistently and on time, your credit score will improve. 

At the end of the 12 months, you will have two choices; you can have all the money paid out to you in your existing bank account, which usually comes with a fee. Or, you can have the money paid into a new bank account free of charge, with a bank that the lender partners with. 

Who are credit builder loans for?

Credit builder loans are aimed at those with limited credit histories or bad credit scores, including young people who haven’t built up a credit history yet. 

These consumers may find it difficult to get approved for loans elsewhere or get high interest rates when they do get approved. Credit builder loans can help these consumers improve their credit profiles and their chances of getting approved for credit in the future. 

Keep in mind that not everyone will qualify for a credit builder loan. Providers each have their own criteria so certain factors like a consumer’s age, location, or income may result in them not getting approved. 

In some cases, if you don’t qualify for a conventional loan, a provider may offer you a credit builder loan. If you can’t find a credit builder loan that works for you, there are other ways to rebuild your credit

Eligibility

The eligibility criteria for a credit builder loan will vary between lenders. However, credit unions will typically require the following:

  • You have to become a member of the credit union.

  • You have to show that you can afford the loan. 

  • You can only have one loan at a time.

  • You have to agree to the loan rates and terms.

Your application will be assessed individually and the amount you may qualify for will be determined based on your affordability, income details, and more. Some loan terms may extend up to 36 months, with fixed APR rates, and often come with additional benefits like life cover.

How to apply

Applying for a credit builder loan is similar to a traditional loan, although the criteria may differ between lenders or credit unions, especially when it comes to your creditworthiness.

At a minimum, you’ll need to be at least 18 years old and have a regular income.

It’s always recommended to compare various loan options to choose the one best suited to your individual needs and one that you can comfortably afford every month. 

Pros and cons of credit builder loans

Credit builder loans have many advantages, including: 

  • Every monthly payment is reported to credit reference agencies. This means that regular, on-time payments will help to improve your credit score. 

  • Paying off a credit builder loan can improve your chances of getting access to credit at more affordable rates in the future.

  • You receive a lump sum of money that you can use as you want.

  • Your credit score will improve every month if you repay on time.

Some of the disadvantages of credit builder loans:

  • You can’t borrow large sums of money.

  • Only certain credit unions and loan providers offer credit builder loans.

  • Sometimes you’ll only receive the money once you’ve made all the repayments.

  • Providers may have specific criteria that you don’t qualify for. 

  • It can be an expensive way to rebuild your credit. 

One of the best benefits of having a credit builder loan is that although your payments get reported to credit reference agencies as normal loans do, the purpose of the loan is not recorded. 

So any lender that does a credit check will only see that you have a loan - they won’t know whether you have taken this loan to improve your credit history or any other purpose.

Other ways to improve your credit score

If you have a poor credit history or have too much debt, you can consider other alternatives like a debt consolidation loan. Creditspring allows you to consolidate your debt into one loan, which reduces your interest rate and allows you to pay off your existing debts sooner. You can check your eligibility online and make your debt much simpler to manage. 

If you don’t have existing debt but need cash fast, you can opt for a short-term loan, also referred to as a payday loan. These loans usually range from £50 to £1,000 but may come with higher interest rates. 

If you borrow from a lender that reports to the credit reporting agencies, it may help to improve your credit score, especially if you keep up with payments. Keep in mind that short-term loans should not be a long-term solution to your credit needs.

Another alternative is sighing up to schemes that can use your financial information such as your rent payments and other outstanding bills, to calculate your credit score. As you pay off your debt your score will improve and you’ll show lenders that you can manage your finances properly.