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Credit-builder loans are a type of lending product that gives people with little to no credit — or other credit problems — a chance to build or rebuild positive credit history.
Where traditional loans may be tough to get if you have rough credit, qualifying for a credit-builder loan may be relatively easy.
But if you need to borrow money ASAP, a credit-builder loan may not be for you. That’s because lenders typically want you to prepay your loan — plus interest — over a period of time (six to 24 months is common). Then, essentially, the money is released back to you.
In a way, a credit-builder loan is kind of like a savings plan that comes at a cost. How much depends on what the lender charges in interest and fees.
Let’s take a look at our picks for three of the best credit-builder loans that may help you boost your credit.
- Best for no credit history: Self
- Best for a full-service banking experience: Digital Federal Credit Union
- Best for quicker access to funds: MoneyLion
Best for no credit history: Self
Why Self stands out: Self (formerly Self Lender) offers its version of a credit-builder loan in all 50 states. All you need to apply is a bank account, debit card or prepaid card; a valid email address and phone number; and your Social Security number — and you have to be a permanent U.S. resident or U.S. citizen and at least 18 years old.
With Self, you’ll make a monthly payment of $25 to $150 for a term of 12 to 24 months (you choose the amount and term length). The money is held in a certificate of deposit account, or CD, that’s insured by the FDIC until you make your final payment. Then the funds are released to you.
Self says it will report your payment history to all three major consumer credit bureaus each month. To benefit from this, you’ll want to be sure to make all payments on time and as agreed.
Here are a few more things to know about Self’s credit-builder loan.
- Setting up an account with Self typically takes just a few minutes. If you have no credit history, you may have to complete some extra steps to verify your identity.
- Beware of fees. There’s a $9 administrative fee to activate your account, and you’ll choose a minimum monthly payment of $25 on up to $150, which includes interest. Self has a sample breakdown of interest and fees on its website, so you can get an idea of the costs.
- You can pay off your account early for a small $5 penalty fee. But keep in mind that closing your account early means not establishing as much credit history.
- If you’re 15 days late on a payment, you’ll get hit with a charge of 5% of your monthly payment. If you’re 30 days late, Self will report the late payment to the credit bureaus, which could negatively affect your credit scores.
Read our full review of Self to learn more.
Best for full-service banking experience: Digital Federal Credit Union
Why Digital Federal Credit Union stands out: Digital Federal Credit Union offers credit-builder loans, but it also provides other financial services, including personal and business banking, credit cards and insurance. It’s one of the 20 largest credit unions in the country, serving all 50 states.
Digital Federal’s credit-builder loans have terms of 12 to 24 months, for amounts from $500 to $3,000. You’ll make monthly payments that get deposited into a Digital Federal savings account, earning you some dividends, and the bank will report your payments to the credit bureaus.
One thing to know is that Digital Federal isn’t upfront on its website about certain costs and qualifying requirements. Here are some more details.
- If you apply for a credit-builder loan, Digital Federal will run a hard credit inquiry, though the credit union doesn’t say what kind of credit profile it’s looking for. That’s a double-whammy: It means applying with no idea about your odds for approval, while almost certainly taking a bit of a hit to your credit scores as a result of the hard inquiry. Digital Federal suggests contacting a representative about your potential for getting approved.
- While you’re on the phone, ask about the potential range of interest rates and any fees you might have to pay. Digital Federal lists its starting APRs — its lowest rates — on its website, but the credit union doesn’t post info on its higher end, and doesn’t reference other fees or costs.
- You can check the credit union’s website for requirements around becoming a member (membership is required to get a Digital Federal credit-builder loan).
- To apply, you’ll need to provide some basic information, like your Social Security number, address, email and phone number, and financial info.
Read our full review of Digital Federal Credit Union for more details.
Best for quicker access to funds: MoneyLion
Why MoneyLion stands out: If your credit needs work and you need money more immediately for an emergency, a loan through MoneyLion’s “Credit Builder Plus membership” might be an option — if it’s available in your state.
MoneyLion is different from our other picks because it offers the potential for faster access to cash, unlike typical credit-builder lenders.
There are some catches, though. First, you’ll have to pay a monthly membership fee — on top of your standard loan payment each month. Also, while “starting” APRs (MoneyLion’s lowest rates) are competitive, there’s quite a range — and the rates on the higher end will cost you.
Here are more details about MoneyLion.
- Once you become a MoneyLion Credit Builder Plus member, you may be able to get approved for a loan of up to $1,000. You’ll get immediate access to a portion of the funds (how much depends in part on your qualifications — you’ll want to call MoneyLion’s 800 number to clarify the maximum that someone can get immediately, as its website isn’t clear on that count).
- Any funds that you can’t immediately access will be held in an interest-bearing account until you pay off the whole amount, much like the other credit-builder loans we’ve covered.
- MoneyLion doesn’t check your credit when deciding whether to approve you or how much immediate cash access you get. Instead, MoneyLion assesses your checking account, which must meet certain eligibility requirements.
- Funding may take up to three business days or as little as 30 minutes. But keep in mind that depending on your bank, there may be a delay between when funds are deposited and when you’re able to access them.
- MoneyLion reports payment history to the three major consumer credit bureaus, giving you the opportunity to build credit by making your payments on time and in full.
Read our full review of MoneyLion to learn more.
What you should know about credit-builder loans
Taking out a credit-builder loan and paying for it according to the terms can be a way to help build positive credit history, making for a stronger credit profile. But before applying, be sure to compare your options. You’ll want to pay attention to the interest, fees and any other costs.
If the lender’s information is confusing or unavailable, call or chat with a representative to ask for clarification. Many lender sites are unclear and difficult to understand, but it’s your right — and in your best interest — to be picky, especially if you’re working on your credit.
You’ll also want to be sure that payments on your credit-builder loan are reported regularly to the credit bureaus. From there, the key is making all your payments on time and in full. Payments reported as late could cancel out the good that a credit-builder loan can do for you.Should I get a personal loan to build credit?
How we picked these loans
We compared credit-builder lenders based on a variety of factors, including accessibility, loan terms, consumer reviews and how quickly you can access funds. We considered a variety of credit unions as well as online institutions in order to see what the best options might be.