Using a Bad Credit Loan to Develop Good Credit

When you need to build or rebuild your credit, there are a few options: obtain a secured credit card, persuade a co-signer to help you with an auto loan, or even become an authorized user on another person’s credit card. Another option, not popularly known, is to obtain a credit builder loan, often called a bad credit loan.

This type of loan is used to establish credit and improve your overall credit score. They can usually be obtained by smaller local banks and credit unions. They are not loans designed to extend you access to money. They are used to establish a solid payment history and boost your credit score.

Why Should I Consider a Bad Credit Loan?

Credit builder loans are especially beneficial to the following people:

  • You have a low or poor credit history – A good credit history is a normal prerequisite for some careers, opening a savings account, or many investments.
  • You need to avoid more credit cards – While multiple credit cards can build credit, they can also be the pathway to ruin, especially if you already struggle with credit card debt.
  • You are preparing for a financial milestone (buying a home, car, etc.) –Better credit leads to being offered a more attractive interest rate for a larger loan.
  • You are starting over and reestablishing credit–After a crisis or bankruptcy, these loans are a great way to begin reestablishing a good credit history.

How Does a Credit Builder Loan Work?

A typical bad credit loan is between $500 and $1,000. By design, they are small and reasonably simple to pay back over a short amount of time. Although small, they may include a substantial interest rate, so always remember you will repay more than the original amount borrowed. As you make regular payments on the loan over time, the lender deposits the money into a savings account that earns interest. You only receive the money when the loan is fully repaid.

Types of credit builder loans.

  • A pure credit builder loan – In this loan, as described above, you make payments to the bank, which are deposited into an interest-bearing savings account. It’s like a layaway plan to build your savings.
  • A secured loan – In this type of loan, the money you wish to borrow must be secured by funds you already possess, as in an existing savings account. This loan typically has a lower interest rate. Again, you cannot access the loaned funds until the entire borrowed amount is repaid.
  • An unsecured loan. Similar to a credit card, you receive the borrowed funds up front to use for expenses and repay the loan at a predetermined rate. The interest rate for this type of loan will be higher.

Are you interested in using a bad credit loan to develop good credit? We can help! Advantage Finance, LLC, can get you started on the road to a great credit score. Call us at (281) 410-5337 or fill out the form on our website for a free quote!

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