What You Need To Know About Credit-Builder Loans
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Credit builder loans are small, short-term installment loans designed to help people with no or low credit build a positive payment history. Unlike traditional loans, you don’t get the money upfront — instead, the loan amount is held in a secure account until the full balance is repaid. Each on-time payment is reported to the credit bureaus, which can gradually boost your credit score if managed responsibly. These loans are typically available through credit unions, community banks, or online lenders, and they can also help you build savings along the way.
Written by Mae Koppes. Legally reviewed by Ben Jackson
Updated July 16, 2025
What Is a Credit Builder Loan?
📈 A credit builder loan is a small loan designed to primarily help two types of people:
People with no or very little credit history
People with poor or fair credit scores who want to boost their score
These loans usually range from $300 to $1,000, though some lenders may offer up to $2,000 or more. The idea is to keep the loan amount manageable so you can stay on track with monthly payments. Doing so helps improve your credit over time.
🏛️ You’ll usually find these loans offered from credit unions, community banks, or online lenders. They’re not always heavily advertised, so it may take a little research to find one near you.
How Do Credit Builder Loans Work?
Credit builder loans work differently than most loans. With a typical loan, the lender gives you money up front, and you pay it back over time. A credit builder loan flips that around.
Here’s how it works, step by step:
You apply for the loan. If you're approved, the lender doesn't give you the money right away.
The lender puts the loan amount — usually $300 to $1,000 — into a locked account. This could be a savings account or a certificate of deposit (CD). You typically can’t access the money while you're making payments.
You make monthly payments over time. These payments include both the loan amount and interest. Loan terms usually last 6–24 months.
Each on-time payment you make gets reported to the credit bureaus. This is what helps build your credit history and improve your score.
Once you finish all the payments, the lender will give you the loan amount minus any fees or interest you paid.
Because the lender holds the money until the loan is paid off, they’re taking less risk. That’s why these loans are often available even if you have no credit or a low credit score.
If you stop making payments, the lender can keep the money in the account to cover what you owe. So it’s important to choose a loan amount and monthly payment that fit your budget.
How Is a Credit Builder Loan Different From a Traditional Loan?
With a traditional loan, like a personal loan, the lender gives the proceeds to the borrower up front. The lender takes on the risk of not getting their money back if the borrower defaults on, or doesn’t repay, the loan. Credit builder loans differ from traditional loans in that the borrower gives the lender the loan proceeds up front. The lender then holds the loan proceeds, which the borrower can draw on or borrow from over time.
Credit builder loans are less risky for lenders because the borrower has to come up with the loan collateral in cash before the loan is made. The lender keeps the collateral proceeds in an account they can access if it becomes necessary. For this reason, the lender is willing to loan the borrower money even though they have either no credit history or bad credit. Some lenders won’t even run a credit check on the borrower if they have enough income to make the loan payments.
How Do Credit Builder Loans Help You Build Credit?
Each month, your lender reports your payment activity to one or more of the major credit reporting agencies — Experian, TransUnion, and Equifax. These agencies track your credit use and payment habits, then use that information to generate your credit report and credit score.
Credit builder loans can be an effective way to build or rebuild your credit because they:
Help you create a positive payment history (one of the most important credit score factors)
Help add variety to your credit mix (credit builder loans are installment loans, unlike credit cards which are revolving credit accounts)
💡 Your credit mix makes up about 10% of your credit score and includes different types of accounts like credit cards (revolving credit) and loans (installment credit). Having both types can help your score, especially if your credit history is limited.
Credit builder loans can be especially helpful if you're just starting out, too. If you’re “credit invisible” (meaning you don’t have a credit report at all), a credit builder loan can help you establish your credit history.
If your credit history is short, adding a new account and managing it well can slowly improve your length of credit history over time.
Just keep in mind: Missing payments can backfire. A single late payment can stay on your credit report for up to seven years. If you're worried about affordability, consider starting with a smaller loan amount and a short loan term to stay in control.
Also, applying for a credit builder loan may result in a hard inquiry on your credit report. This can cause a small, temporary dip in your score. But it’s usually worth it in the long run if you're building a strong payment history.
What Are the Pros and Cons of Credit Builder Loans?
Credit builder loans can be a helpful tool if you're working to build or rebuild your credit, but they’re not the right fit for everyone.
To figure out if it’s right for you, consider the following pros and cons.
Pros of Credit Builder Loans
Credit builder loans have a lot of upsides. Here are the main pros to consider:
They can help you build your credit history: Each on-time payment gets reported to the credit bureaus, which helps you build a positive payment history. This is one of the biggest factors in your credit score.
There’s no large up-front deposit required: You don’t need to hand over the full loan amount to get started. Instead, you pay over time and get the money at the end.
It also creates a savings cushion: When the loan ends, you receive the full loan amount back (minus interest or fees). Many people use this as a way to build up emergency savings.
They’re easy to qualify for: Because the lender holds the money until you’ve paid off the loan, there’s less risk for them. That means these loans are often available even if you have no credit or bad credit.
Cons of Credit Builder Loans
There are also some downsides to credit builder loans. Here are some important cons to consider:
You don’t get immediate access to cash: Unlike a traditional loan, you don’t get the money up front. You’ll only receive the loan amount after you’ve made all the payments.
You’ll pay interest and possibly fees: While the rates are usually lower than payday or high-risk loans, you still pay interest on the loan. Some lenders may also charge administrative fees.
Missed payments can hurt your credit: Just like with any loan, if you miss payments or pay late, it could damage your credit instead of help it.
Monthly payments may be a stretch if your budget is tight: If money is tight, even a small monthly payment can be a burden. Be sure the loan terms fit your situation before signing up.
Alternatives to Credit Builder Loans
If you decide the downsides outweigh the upsides, but you’re still looking for ways to build or rebuild your credit, there are still other options! Let’s look at some alternatives.
Become an authorized user on a trusted friend or family member’s credit card. (You don’t have to use the credit card to benefit from being an authorized user.)
Get a co-signer on a traditional loan or credit card. If you go this route, be sure you’re both aware of the risks and benefits.
Get a secured credit card.
Consider non-credit options like this free rent-reporting tool from Self to boost your credit.
We explore these and several more ideas in our popular article 6 Simple Ways To Build Credit and Raise Your Score.
Will It Really Improve My Credit Score?
Yes, credit builder loans can be an excellent way to rebuild your credit score over time!
That’s because 30% of your credit score is based on your payment history. So, if you stay current on your credit builder loan payments and any other monthly payments, you’ll start to see your credit score improve.
If you start making late payments or miss payments on your credit builder loan, you will hurt your credit score. That's why it's best not to take out one of these loans if you aren’t certain that you can make the monthly payments.
📌 Tip: Start with a small loan and small monthly payment that you feel confident you can make every month.
Where Can You Get a Credit-Builder Loan?
In most cases, regional banks, community banks, local banks, and credit unions offer credit builder loans.
There are also many online lenders offering these types of loans. Upsolve partners with Self, which has credit builder loans, secured credit cards, and a free rent-reporting tool to help folks working to rebuild their credit.
💡Some of these loans go by different names like fresh start loans.
Be sure to do your research before deciding on a lender. Check reviews and ask questions about the interest rate, repayment terms, and other options.
What Should I Look for When Shopping for a Credit Builder Loan?
Not all credit builder loans are the same. Before you sign up, take time to compare a few options. Here are some important questions to ask:
What is the APR (annual percentage rate) or interest rate?
APRs for credit builder loans usually range from 10% to 15%, but they can vary. Some online lenders may charge more. Even though that might sound high, it's often still cheaper than payday loans or other types of fast credit.
What’s the total cost of the loan?
Ask the lender what the full cost will be, including interest and any fees. If they can’t tell you, try using an online loan calculator to estimate the total amount you’ll repay.
Are there any fees?
Some lenders charge application or account setup fees, which could reduce the amount you get back at the end of the loan. Ask about all fees up front.
Will my payments be reported to all three credit bureaus?
This is important. You want the lender to report to Experian, Equifax, and TransUnion so you get the most benefit from your on-time payments. If they only report to one or two, your credit-building progress might be slower.
Can I pay off the loan early?
Some lenders allow early payoff without penalties, which can help you save on interest. Others may charge a fee or limit early repayment, so ask before committing.
What are the monthly payments and how long is the loan term?
Make sure the payment fits your budget. Loan terms are typically 6–24 months. A shorter term means less interest but higher monthly payments.
How will I get the money at the end of the loan?
Once you’ve made all your payments, the lender should release the full loan amount. Ask how they’ll return the money — by check, direct deposit, or another method — and how long it will take.
Look at multiple options and compare lenders to find the best deal for your situation.
