Know What’s a Credit Builder Loan & How to Build a Better Financial Future

A credit builder loan does not operate like a regular loan. As the name suggests, this specific type of loan caters to anyone who wants to improve their credit score. Whether you are new to credit or don’t have a good credit score, opting for this type of credit is beneficial. 

Read on to learn more about this type of loan, how to get it and more. 

What is a Credit Builder Loan?

One of the easiest ways to build your credit history and score is by paying your loan EMIs on time. However, you can only get a loan with a good credit score. To overcome this paradox, some lenders offer a different type of credit focusing on building creditworthiness instead of financial requirements. 

This loan works in the reverse order: you get the funds after you have made all the EMI payments. To simplify, you choose your loan amount by calculating a suitable EMI when applying for this loan. Lenders keep this loan amount secure in a savings account for the chosen tenure. 

After paying all the EMIs, they credit the funds to your preferred bank account. Lenders report your good credit behaviour to the credit bureaus during the tenure. This way, your credit score increases with every EMI that you pay on time. 

Pros and Cons of a Credit Builder Loan

Before you plan to apply for this loan, note these key points to make a well-informed decision.  

Pros

• It helps build your credit score if you make timely payments
• It gives you access to credit even if you are not eligible for traditional loans 
• It improves your chances of future credit 
• It helps boost your savings 

Cons

• It has a risk of hurting your credit health, even if you miss even one EMI 
• It gives access only to a small amount of credit 
• You may have to pay higher fees and interest rates than other loans  
• It limits your choices, as many lenders don’t have this option 

Steps to Get a Credit Builder Loan

Follow this process and apply for a loan to boost your credit score: 

Research for the Right Lender

Since not all lenders offer this form of credit, it is not readily accessible. However, with proper research, you can find a lender offering a credit builder loan. 

Compare the Options 

After you have created a list of a few reputed lenders, compare their loan terms. This helps you shortlist the one offering the lowest interest rates and nominal fees. 

Choose the Loan Amount 

You need to decide on a loan amount you can afford to repay before applying. This is because a higher loan amount will attract a higher interest rate. It further increases your EMI, so choosing a comfortable amount is imperative. 

Submit the Loan Application 

After finalising the lender and loan amount, you can apply online with the required documents on the lender’s website. 

Make Timely Payments 

Following the approval, pay your EMIs on the specific date to boost your credit score. 

While this option is particularly designed for people with damaged credit scores, finding a lender offering this type of credit can be difficult. An alternative to this is to choose lenders who don’t rely on credit scores, like Fibe.

With the Fibe Instant Personal Loan, you can secure up to ₹5 lakhs at competitive rates and a convenient tenure of up to 36 months. Thanks to our alternative credit scoring system, you can apply even with a low or no credit score. This is also why we approve up to 98% of the applications without hassle. 

You can easily check your eligibility on our online platform or app and apply instantly. In addition, we levy zero foreclosure charges, so you can close your loan before the tenure without paying any surplus amount. Download our Personal Loan App or visit our website to opt for this loan and build your credit score with ease. 

FAQs on Credit-Builder Loan

How does a credit builder loan work?

To simplify, here is how a credit builder loan works. 

• Find a lender that offers this type of loan and apply for it.
• Choose a preferred loan amount as per your budget restrictions.
• Lenders deposit the amount in a certificate of deposit or savings account.
• You start paying fixed monthly instalments.
• After you have paid all instalments, the loan amount minus any fees gets disbursed into your account.
• With each timely repayment, your score increases. This reverse process reduces the lender’s risk while improving your financial health. 

Are credit builder loans secured or unsecured?

Credit builder loans are of three types, as described below. 

1. With a pure credit builder loan, the loan amount gets credited into your account. But you cannot access it until you have paid the complete loan with interest.
2. With the secured credit builder loan arrangement, the funds available in your savings account act as collateral until you completely repay the loan.
3. An unsecured type is the most common method for this arrangement, where lenders deposit the funds into your savings account. After complete repayment, you can use it as you prefer.