If your credit score is low or nonexistent, it can be very difficult to improve it or secure any sort of financing. Most lenders are hesitant to lend to individuals with poor credit, as they see it as too risky. However, this is where a credit builder loan may be a good alternative. This type of loan is designed for people with credit issues and offers a way to prove reliability as a borrower, which will improve the borrowers’ credit score.
So how does it work?
Unlike a traditional loan, where you receive the borrowed amount upfront to use as you wish, with a credit builder loan, the lender deposits the loaned amount into a secured savings account. You then make regular monthly payments to the lender, which will demonstrate your ability to repay debt responsibly. Paying on time will also help improve your credit score since the payments are reported to credit bureaus. Once you’ve paid off the loan, you’ll get the funds back, plus any earned interest, along with a better credit score.
Who can benefit from a credit builder loan?
People new to credit: If you’re just starting out, this loan can help you establish a credit history.
Those with a poor credit score: If your score is low, this loan can help you demonstrate responsible debt management.
Anyone looking to improve their credit score: Even if you already have a credit history, making on-time payments through this loan can help raise your score further as well as improve your credit allocation mix.
Who offers credit builder loans?
For Canadians, BMO has one that is easy to apply to. You can also talk to an advisor at another bank to see if it’s something they offer.