Credit Builder Loans Explained

Credit builder loans are small loans that can help boost credit scores. They are typically offered by credit unions and local community banks, though are not widely advertised.

Credit builder loans, known also as “fresh start loans” or “starting over loans,” are especially appealing for those who would like to improve their credit standing. They do not require a good credit score for approval, making them particularly friendly to those who have poor credit, or little to no credit history.

Credit builder loans can be thought of as a stepping stone to key financial goals such as acquiring a credit card, or approval for a large loan or mortgage. If managed properly, they can have a positive impact on credit scores, which largely determine credit card and loan approvals, and even interest rates.

Credit builder loans also help prepare consumers for greater financial responsibility. Lenders place strict limitations on these loans to manage risk, which results in borrowers being conditioned to save regularly.

How Does a Credit Builder Loan Work?

Credit builder loans are most suited to those whose credit needs improvement, but generally have their finances under control. That is, while good credit is not required to obtain a credit builder loan, an income that can cover payments is. It is through regular, on-time payments that your credit score will improve.

There are different types of credit builder loans, depending on the borrower’s aims. A pure credit builder loan, for instance, deposits the loan amount in an account and the funds only become accessible when all payments have been completed. Such an arrangement is beneficial to both lender and borrower.

For the lender, it minimizes risk in case there is a failure on the part of the borrower to make payments. For the borrower, it spares them from further compromising their credit and encourages them to save regularly.

What Are the Types of Credit Builder Loans?

A borrower can take out either a secured or unsecured credit builder loan. Each has specific features, and deciding which one is best will depend largely on the borrower’s needs. A secured loan usually requires some form of collateral such as the amount one already has in the bank. This type of loan is useful for those who would like to improve their credit or build a long credit history.

The loan amount is held while the borrower makes regular payments. These payments must always be made on time to reflect positively on credit reports, which are the basis for credit scores. It can be tempting to pay off the loan at once, but it is better to be patient and make the payments across the entire loan period. This will help build credit history.

On the other hand, an unsecured loan does not require any collateral. It enables the borrower to take out a lump sum up front, but with generally higher interest rates than a secured loan. This type of loan should be considered only when a sudden large payment must be made, like for a medical emergency or urgent home repairs.

Credit builder loans are designed to improve your credit history, but it is worth remembering that credit scores will still be affected by one’s other accounts or services, especially if late payments are still being made on them.

How Do You Get a Credit Builder Loan?

Financial institutions generally simplify the process of obtaining a credit builder loan. You must be at least 18 years of age and have a valid social security number.

A credit union or local community bank may require an existing account. For some credit unions, membership requirements such as employment in certain sectors or residence in a specific area may also be a factor.

When aiming for a credit builder loan, you must be ready and willing to make all of the payments regularly and on time. Failure to do so will further damage your credit score. Choose the best type of loan to apply for depending on your needs.

Understand the terms for each type, including whether collateral is needed, what payment rates you can afford, and how reports are made to the credit bureaus.

Finally, find out if your current bank offers credit builder loans. Financial institutions with which you already have an account would be more receptive to your application and needs.

Where Can You Get a Credit Builder Loan?

Credit unions or local community banks offer credit builder loans. These are not often advertised, so be mindful to ask. Remember that credit unions may require specific membership, or in some instances, a small charitable donation. Also, you may need to find out if your area permits these types of loans, though most states do.

You may also explore online lenders by evaluating terms across different websites. Find out if they are licensed to offer loans in your state. For example, LendUp is an online lending company that offers short term loans and education.

While your first loans with LendUp will not report to the credit bureaus or build your credit, we offer the ability to obtain these loans over time in most states.

LendUp operates on the principle that everyone should have access to quality credit, offering assistance in the form of short-term loans, and resources for credit building and financial empowerment.

Getting a Loan from LendUp

LendUp offers 24/7 access to short-term loans through a fast online application that is also conveniently available on mobile devices. On our site, decisions on loans are made instantly, which means you may have a loan approved right away and funds in as little as one business day.

We are upfront with rates, with no hidden fees or debt traps ever. More importantly, we offer education and relevant resources to help our customers build good credit and promote responsible financial practices.

After successfully repaying some of our initial short-term loans, LendUp eventually offers credit-building products where available. LendUp is designed to be a better alternative to predatory payday or emergency loans.

We provide a chance for users to adopt better financial habits, and pave their own way to financial health. Over time, LendUp assists in providing access to higher loans and better interest rates through the LendUp ladder (where available). We look beyond credit scores to assist anyone with the desire to establish quality credit.

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