You have to start somewhere. If you have bad credit, limited credit, or no credit history at all, you know this better than most people.
You may also know that responsibly using credit — be it an installment loan for people with bad credit, a low-limit secured credit card, or a line of credit specifically designed to build credit — is a great way to dig yourself out of a credit hole.
These products are all structured as loans, and they’re specifically designed to build credit and bulk up your credit report without costing you an arm and a leg.
The Best Credit-Builder Loans for 2022
All the credit products on this list can help you build or rebuild your credit if you use them responsibly and pay your bills on time. All are widely available. That’s a big advantage over credit-builder loans issued by community banks, credit unions, and some localized online lenders, and a key criterion for inclusion on this list.
Each of the lenders mentioned here does at least one thing really well, whether it’s offering unusual borrowing flexibility or a wide range of loan amounts and terms. Our best overall pick delivers the best value on the path to building good credit, in our view.
Best Overall: Self
Formerly known as Self Lender, Self is the best credit-builder loan company on the market right now. It offers four loan plans tailored to different income levels and time horizons. The higher-priced plans deliver larger payouts when the loan term expires, while longer-term plans build your credit for longer and may result in a higher ending credit score:
- Small Builder: Pay $25 per month for 24 months to get $520 cash at the end of the term. The total cost is $89 for an effective APR of 15.92%.
- Medium Builder: Pay $35 per month for 24 months to get $724 cash at the end of the term. The total cost is $125 for an effective APR of 15.97%.
- Large Builder: Pay $48 per month for 12 months to get $539 cash at the end of the term. The total cost is $46 for an effective APR of 15.65%.
- X-Large Builder: Pay $150 per month for 12 months to get $1,663 cash at the end of the term. The total cost is $146 for an effective APR of 15.91%.
Self is unusually flexible and borrower-friendly too. Additional features include:
- A flat administrative fee of just $9, regardless of loan plan
- No hard credit pull and no credit score required to apply
- Reports to all three major credit bureaus
- Cancel anytime before the end of the loan and get your payments back, less interest and fees — without damaging your credit
- Get access to the Self Credit Builder credit card in as little as three months — choose which portion of your accumulated balance to use to secure the card
Best for Low Payments: SeedFi
SeedFi is the best credit-builder loan provider for borrowers who can’t or don’t want to put much toward their loans each month. Its payment plans start at just $10 per month.
It gets better. SeedFi’s Credit Builder Prime plan is technically free — all the money you put in the plan’s savings account is yours, and SeedFi doesn’t deduct interest or fees. The catch is that you have to contribute at least $500 to get your money back, which can take more than four years at the $10 monthly minimum.
SeedFi also offers more traditional credit-builder loans through its Borrow & Grow plan. Here, you get access to a portion of your loan right away and the remainder after you complete your payment plan.
- Get up to $4,000 immediately with Borrow & Grow, although lesser amounts are typical
- Borrow & Grow interest rates start around 8%
- Borrow & Grow payments start at $80 per month or $40 per week
- No credit check with Credit Builder Prime
Best for Higher Loan Limits: CreditStrong
CreditStrong is also known for low payments. Its payment plans start at just $15 per month. But the real selling point here is the opportunity for a super-high borrowing limit by credit-builder loan standards: up to $10,000 in loan funds.
CreditStrong offers an unusually wide array of loan structures as well. Its loans fall into three general categories:
- Subscribe: For $15 to $30 per month, save up to $2,500 over as long as 10 years.
- Build and Save: For as little as $38 per month, save up to $2,000 in 24 to 36 months.
- MAGNUM: For $55 to $110 per month, save up to $10,000 over as long as 10 years.
- No credit score required
- No credit check during underwriting
- Cancel anytime and get your principal back, less interest and fees, with no impact on your credit
- Interest rates start around 7.5%
- Business credit building options available
Best for Comprehensive Financial Services: MoneyLion
MoneyLion is the most well-rounded financial app on this list. With a built-in everyday bank account and debit card, it’s much more versatile than your typical credit-builder loan. Its capabilities include:
- Up to $1,000 in interest-free cash advances against your next paycheck
- Round up your debit card purchases and convert the difference to bitcoin
- Earn cash-back rewards on eligible purchases
- Get your paycheck up to two days early with eligible direct deposit
- Auto-invest starting with just $5 and pay no asset management fees
MoneyLion’s credit-builder loan boasts competitive interest rates and a short 12-month term, which means less paid in interest over the life of the loan. In exchange for a $19.99 monthly membership fee, you get additional features like:
- Immediate access to a portion of your funds
- Additional cash advances against your loan balance — up to $300 per pay period with no interest charges
- Robust credit monitoring tools
- Personalized credit building tips and insights
Best for Credit Union Fans: Digital Federal Credit Union
Digital Federal Credit Union, or DCU, offers one of the most borrower-friendly credit-builder loans around. The headline is the very low interest rate — fixed at 5% APR.
That shouldn’t be a surprise, as DCU is a credit union known for low interest rates and competitive terms. If you’re looking to establish a new credit union relationship that’s not limited by geography while building credit, give DCU a closer look.
- Choose from 12- or 24-month terms
- Earn dividends (interest) as your savings balance grows
- Borrow $500 to $3,000, depending on your needs
Methodology: How We Select the Best Loans for Building Credit
We use several key criteria to evaluate credit-building personal loans and the lenders that offer them. Each relates in some way to the overall quality of these loans: their cost, ease of use, flexibility, and more.
Ease of Application
If you’re applying for a credit-builder loan, you might not be a seasoned borrower. Which means you might not be familiar with the ins and outs of the credit application process.
That’s why we prefer credit-builder loan providers that make it easy to apply online in a single sitting. Although you should always expect to provide proof of identity, residence, and income, you shouldn’t have to fax these documents or bring them to a physical bank branch.
Unless you want to, of course.
Credit-builder loans aren’t as risky as they seem. The lender often keeps the proceeds in an account they control, so if anything goes wrong, they can simply take your money and close out the loan.
Nevertheless, some lenders do require hard credit pulls as a condition of underwriting. Where possible, we look for lenders that don’t have this extra requirement. Instead, they allow borrowers to apply with just a soft credit check or no credit check at all.
Credit-builder loan terms are generally short, often just one to two years. If you need more time to pay off your loan, look for a lender that’s a bit more flexible on this point.
We’re fans of providers that go all the way up to five years. Just remember that you’ll pay more interest over the life of a longer-term loan, even if the interest rate and loan amount are the same.
Credit-builder loans aren’t known for excessive fees. However, some providers charge monthly or annual membership fees that cover the cost of the loan and other associated benefits. These aren’t necessarily dealbreakers, but we prefer lenders that omit them.
Other possible loan fees include origination fees and late payment fees. Again, we prefer lenders that keep these to a minimum.
Credit-builder loan interest rates typically come in lower than secured credit cards. This is great for borrowers who don’t want to pay massive amounts of interest over the life of a loan. But small differences in the rate can still add up, so we’re mindful of who’s charging what.
Credit-builder loans tend to be small. When the primary purpose of the loan is to build credit, and you might not even have access to the funds, this isn’t a bad thing. It has the added benefit of keeping monthly payments low.
All that said, we give preference to lenders that offer the option of larger loans — upwards of $1,500 where possible. That way, you’ll have a bigger windfall when you pay off the loan.
Access to Funds
Many credit-builder loan providers restrict access to loan proceeds until the term ends. This limits their risk and helps keep interest rates low.
However, we do appreciate more lenient lenders. And we’re especially fond of lenders that let you cancel your loan in the middle of the term if you’re struggling to make payments. Do this and you should get back any principal you’ve paid, meaning your efforts won’t have gone to waste.
Become a Credit-Builder Loan Expert: Your Questions Answered
You have questions about credit-builder loans. We have answers.
What Is a Credit-Builder Loan?
A credit-builder loan is an installment loan specifically designed to build the borrower’s credit. It usually has the following features:
- Low loan principal, typically under $3,000
- Relatively low interest rates in comparison to credit cards
- Relatively short loan terms, often under five years
- Restrictions on how you can use the proceeds before paying off the loan
Don’t confuse credit-builder loans with credit-builder lines of credit or secured credit cards. While these products have similar purposes, their interest rates tend to be higher and their terms are open-ended, meaning you can carry a balance indefinitely as long as you make minimum payments.
Can a Credit-Builder Loan Hurt Your Credit Score?
If you don’t make your payments on time or stop paying your loan altogether, a credit-builder loan can definitely hurt your credit score.
As with any other loan or line of credit — or any other bill for that matter — you need to make good on your promise to repay your credit-builder loan on time and in full. Otherwise, your credit score could end your loan term in worse shape than it began.
How Much Does a Credit-Builder Loan Cost?
It depends on the interest rate, fees, and loan amount. Credit-builder loans generally have lower interest rates than credit cards, but the fees can add up. Look for a loan with a low or nonexistent origination fee and no ongoing “membership fee,” which really just adds to the total cost (and effective interest rate) of the loan.
What If You Can’t Make Payments on Your Credit-Builder Loan?
Talk to your lender about options for modifying or deferring your loan payments. The lender may require you to show that you’re experiencing financial hardship due to job loss, reduced work hours, or an unexpected financial emergency.
You shouldn’t expect your lender to work with you to reduce or suspend your payments. If they allow you to cancel your loan and pocket any principal you’ve paid so far, consider taking the deal. It’s better than the alternative — defaulting on your loan, forfeiting the proceeds, and seriously damaging your credit.
How to Choose the Best Loan for Building Credit
Start by assessing your strengths and weaknesses as a borrower.
If you’re truly new to credit — as in, you don’t even have a credit score — you’ll need to stick to loans that don’t require a credit check. If you do have a credit score and it’s just not where you’d like it to be, you can expand your search to loans that require credit pulls.
From there, look for reasonably priced loans with good interest rates, low fees, and flexible terms. If you’re looking to use your loan to jump-start your emergency savings fund, make sure the loan is big enough and you’ll have easy access to your funds once the term is up.
Don’t forget to read the fine print on your loan. Make sure the lender reports your payment history to all three major credit bureaus: TransUnion, Equifax, and Experian. Make sure you won’t have to pay a recurring fee — or, if you do, that it’s reasonable. And make sure you meet any minimum borrowing requirements that the lender discloses upfront, such as a minimum income or credit score.
Finally, if you’re not finding any suitable credit-builder loans, consider pausing your search and working to improve your credit score. Do this well enough and you might find you have no use for a credit-builder loan after all. You can skip right to more appealing financial products, like cash-back credit cards.