The credit builder loans are popular for helping people build their credit base. However, they are in stark contrast to a regular loan and entail a cost. For an entrepreneur, the relevance of such loans is crucial to understand so that they can decide whether they ought to get one or not.
Credit history requirements might make it difficult for an entrepreneur to obtain funds from their typical sources. Most lenders will demand to scrutinise your credit history to determine if you should be given a credit facility. However, a credit builder loan is what might get you off the hook in this situation.
What Is A Credit Builder Loan?
There is no need for a credit history to avail of a credit builder loan. As the name suggests, the loan helps you build a credit history with the repayment of loan instalments. For an entrepreneur who is starting out their journey and requires funds, a credit builder loan can serve the purpose, while also helping them build a credit history.
The only downside you can associate with a loan such as this one is the cost that it entails. You will have to bear the payment of interest expenses on loan. However, depending on your lender, you may be able to obtain reimbursement of the same at the end of the repayment period.
Since it can be quite difficult to become an authorised user on someone else’s account, taking a credit builder loan is one of the most suitable alternatives for an entrepreneur.
Working Of A Credit Builder Loan
A credit builder loan operates in a different way as compared to a traditional loan. Instead of receiving the money upfront, a lender will deposit the loan amount on a savings account, restricting you from withdrawing money out of it. Unless you pay off the loan instalments, you will not be able to make use of the loan amount.
The working of a credit builder loan is quite similar to a secured card. The amount of loan is held securely in an account and is deemed to be a collateral. This is the reason why such loans happen to be far more secure for lenders, who will receive the payment of instalments before the borrower can access the loan amount.
To many entrepreneurs, this may appear to be a backward approach, without enough benefits. However, going by the purpose of a credit builder loan, it is clear that it works well to build your credit history. It conveys to the lenders that you are capable of repaying your dues on time.
Once you have repaid the instalments due against the loan, you will be able to withdraw the complete amount of deposit in the savings account. Generally, loans such as these entail a fixed rate of interest, which may vary from one lender to another. It is best to look for different lenders and assess their apr (annual percentage rates) to judge which one will be best for you.
How Does A Credit Builder Loan Help An Entrepreneur?
In many ways, a credit builder loan is analogous to a personal loan or an auto loan. The difference lies in the purpose for which you take this loan and how you get the loan amount.
To determine your credit score, you will need to build a credit history. The details of your repayment and the timeline you follow to repay the due amount will impact this score. Over time, you will need to build a good credit score to form a good reputation as an entrepreneur.
Taking a credit builder loan helps start this journey on a positive note and helps construct a credit history for you. This is especially useful for entrepreneurs who are completely new to their line of work and have no accounts to show their credit history.
With this base, you will be able to pave your way towards additional sources of credit, such as credit cards, personal loans, business loans and more. As a result, you can explore newer business opportunities and enter newer venture options without facing any financial hurdles.
You will be able to access a vast pool of lenders, who may be willing to extend the credit source to you. Reach out to different lending circle components to find out the best rates of interest you can get for taking this loan.
Making The Most Of Your Credit Builder Loan?
You can follow the tips given below to ensure that you can reap the maximum benefits of a credit builder loan:
- Always pick a comfortable option for a credit builder loan. Remember that the purpose is to repay the instalments on time, and thus, these instalments should be such that you can afford them. Also, consider the term of such loan and avoid going for an extremely short or long term loan.
- Make sure that you pay the due amounts on your loan within the time frame allowed for it. Delaying your due payments will only dampen the purpose of the loan.
- Always make it a point to monitor your credit score from time to time. Although minor changes do not mean much, it is a comfortable option to monitor it from time to time.
- Decide in advance what you are going to do with the proceeds of the loan amount, once the due instalments have been paid back. Consider using it for investment or saving.
Do not look at it as if a credit builder loan is your only option to build a credit history or enhance your credit score. Remember that there are fees and costs associated with this loan and that you will not be getting any amount unless you pay back the due amount completely.
Before turning to a credit builder loan, also consider the possibility of using a secured card or using a credit card by becoming an authorised holder on account of another person. Only when you do not have access to these options, should you turn to a credit builder loan to build a credit history.