Building a credit history isn’t as easy as getting and paying off a conventional loan. Sometimes it is difficult for consumers – such as those who are recently divorced, recently graduated, or newly immigrated – to have sufficient credit history to get a loan or open a credit card.
Homeowner loans can be a perfect way for someone who doesn’t have a credit report to start building one. There are approximately 26 million American adults in this “invisible credit” situation. Credit loans give borrowers – whether they are building or rebuilding their credit history – a chance to show that they can make regular payments.
If you successfully use a credit loan, you may be able to improve your credit history and, as a result, your credit score. This could help you qualify for larger loans over longer periods and get unsecured credit cards.
[Read: Best Rewards Credit Cards.]
How does a home builder loan work?
Credit loans are different from other loans because the financial institution requires you to make payments before you get the full loan amount. This contrasts with a typical installment loan which immediately gives you the loan funds, which you pay back over a period of time.
“You don’t need the money; you need a better credit rating, ”says Michael Emancipator, vice president and legal counsel for Independent Community Bankers of America.
At the start of the loan process, the lender will transfer their funds to an escrow account and then you will start making regular payments. Depending on the arrangement, the lender may provide part of the funds after payments have started or wait to give you the loan until the payments are complete.
“The client does not have access to the money but will make payments amortized over 12 months or over the chosen period, as well as interest,” says Emancipator. “At the end of the day, they can access the money.”
Loans come in a variety of amounts, payment periods, and interest rates:
– Amounts generally vary from around $ 300 to $ 1,000.
– Payment terms are generally six months to two years.
– The funds are deposited into your savings account.
“It’s a loan with training wheels – so easy to get, easy to repay,” says John Ulzheimer, president of The Ulzheimer Group and national credit expert who previously worked with Equifax and FICO. “Unless you’re really attached, really irresponsible, this should work just fine.”
A word of warning: a homebuilder loan will not have as much of an influence on the credit rating of the customer who is rebuilding their credit as it would for the first borrower. Still, says Jordan van Rijn, a former senior economist with the Credit Union National Association, it can help.
What to look for in a credit building loan
Before getting a credit-builder loan, make sure the lender will report your payments to the three credit bureaus – TransUnion, Equifax, and Experian. Since lenders often consult only one credit bureau when taking out a loan, it’s important to cover all three.
In addition, you need to make sure that you can meet the terms of the loan, mainly the amount of the monthly payment and the length of the loan. If you are unable to make the payments on time, the benefits you hoped to get from the Homeowner Loan may be reduced or backfire completely.
What are the requirements of the constructor credit loan?
A lender may offer an optional credit loan if you are trying to build credit or if you are trying to rebuild credit after a major problem, such as bankruptcy.
Once you get something positive on your credit report, it “changes the way lenders and service providers look at you,” says Ulzheimer.
For example, recent college graduates who have not yet obtained a credit card might have a better chance of renting an apartment or getting a mobile phone account thanks to the positive credit history achieved through a credit loan- builder.
There are few credit requirements for this type of loan. Simply :
– Show that you have a source of income that allows you to make payments of around $ 50 to $ 100 each month during the life of the loan.
– Do not have unresolved financial judgments.
If you have financial judgments against you, “We usually advise people to pay them off first,” explains van Rijn.
[READ: Best Bad Credit Loans. ]
Where to get a home builder loan
You are more likely to get a credit loan from community banks, credit unions, or online lenders.
Credit loans are not very profitable, which is why some financial institutions do not offer them. Yet some local banks and credit unions rely on these low-risk products to steer customers into more traditional borrowing vehicles such as auto loans and mortgages.
“You won’t necessarily see customers walking into a bank asking for that particular product,” Emancipator explains. “But it can be brought up by a banker to a customer in financial difficulty or who does not have a credit score to get into a more traditional product.”
There are about 5,300 credit unions across the country, and about a quarter of them offer some kind of credit loan, says van Rijn. In total, almost half of the members of credit unions nationwide have access to loans. Although you must be a member to get a loan with a credit union, it is fairly straightforward to become a member. Just look for a location nearby and see what the requirements are, says van Rijn.
Alternatively, you can search for home loan builder loans online to see which lenders are offering them. It could also be a lender who has a physical presence somewhere in the United States, but who conducts loan transactions online.
[Read: Best Online Banks.]
Other ways to accumulate credit
Taking out a builder loan is not the only way to build your credit and improve your score. You can also:
– Open a secure credit card. Unlike more traditional unsecured credit cards, secured cards require you to make a deposit – which usually becomes your line of credit – before you can use the card. Unlike home builder loans, you can get immediate access to the funds. Make your payments monthly and pay off the entire balance to avoid accruing interest.
– Become an authorized user. With some credit cards, the primary cardholder can add an authorized user to the account. The primary cardholder is still responsible for the debt, but the authorized user can claim a credit card account against his or her credit history. When this strategy is well managed, it is a good way to build credit.
– Get help from a co-signer. If you can’t get a loan, a co-signer with good to excellent credit can help. A co-signer can guarantee the lender that someone will make the payments, either you or the co-signer. This is a solution that parents could choose if they want to buy a car for a child who is a student and has no job yet. Once the children start working, they can take over the payments.
– Join a circle of lenders. This type of loan agreement has been around for many years in various cultures, in which group members lend money to each other. Participation in a loan circle can help your credit history and score if the organization that manages the circle reports to all three credit bureaus.
Homeowner loans can be a good choice for improving your credit history, but there is no guarantee of success. You need to show that you take your credit seriously, and the best way to do that is to make your payments on time.
[Read: Best Personal Loans.]