There are myriad reasons a good credit score is important, and having the ability to qualify for a car loan or credit card is just the tip of the iceberg. Without good credit, it can be harder to rent your own apartment without a co-signer. If you plan on becoming a homeowner in the future, you’ll also need excellent credit to qualify for the best interest rates and terms on a mortgage – and at least decent credit to qualify at all.
Finally, bad credit can cost you in too many ways to count. Not only can poor credit mean being denied financing or paying higher interest rates on car loans and other debts, but it can lead to higher insurance rates, too. If you apply for a job and your employer exercises their right to ask for a modified version of your credit report, poor credit could also cause you to miss out on a job you really want.
And, if you have no credit, well, the story is similar. It can be difficult to qualify for any type of loan until you have some sort of credit history — which, in a Catch-22, is hard to do when you can’t get approved in the first place.
- Related: How to Build Credit
Save Up and Build Credit at the Same Time with Self Lender
Fortunately, there’s a fairly new way to help your credit, whether you want to rebuild poor credit or start building a good credit history from scratch. With a business called Self Lender, you can apply for a credit builder loan that helps you build credit while saving money.
Loans through Self Lender don’t work like traditional loans: You make a fixed payment each month, and get the money in a lump sum at the end, not upfront. But the credit outcome is the same, since the payments you make are reported to the three credit reporting agencies – Experian, Equifax, and TransUnion. If your credit needs repairing due to poor decisions you made in the past, or you need to build credit from scratch, here’s how Self Lender works:
How Self Lender Works in Six Steps:
- Apply for a Self Lender loan with no credit check required. Because this type of “loan” is secured by your own payments, you don’t need to pass a credit check to qualify. Self Lender loans are available to individuals with poor credit or no credit, making them a viable option if you’re starting from scratch.
- Choose the ideal credit builder loan for your needs. Credit builder loans are available in 12- and 24-month increments in amounts up to $2,200. Once you decide to apply, you can choose among one of the available loan options.
- Make monthly payments for the duration of the loan. Once you apply for a loan, you’ll start making the monthly payments you’ve agreed upon.
- Your money is saved in a certificate of deposit (CD) that earns interest. The payments you make are saved for you in a CD that earns 0.10% APY. That’s nowhere near the best CD rates out there, but it’s something.
- Your monthly payments are reported to the credit reporting agencies. Here, of course, is the key to the whole concept: As you repay (or prepay, as it were) your loan, the monthly payments you make are reported to the three credit reporting agencies — Experian, Equifax, and TransUnion. In that sense, a credit builder loan can help your credit profile just as much as using a credit card or personal loan would.
- Once you complete the terms of your loan, you get your money back in a lump sum. Once you make all the monthly payments you’ve agreed to, you’ll get a payout of all the cash saved in the CD on your behalf.
How Much Does Self Lender Cost?
While Self Lender isn’t free, it’s not very expensive to use, either. First off, you will need to pay a $12 upfront account activation fee. On top of the activation fee, you’ll also pay interest on your “loan,” with an APR of “up to 15.65%.”
While that may sound like a lot — especially when you’re the one lending them money — it’s a fairly small price to build credit in this way. And, since loan amounts are small, even if you’re charged the top interest rate, it wouldn’t add up to much.
Self Lender offers the following example on their website. Imagine you took out a $1,000 credit builder loan for 12 months. In that case, you’d pay $12 upfront plus $89 per month for one year.
That would make the total cost of your “loan” $1,080. Once the loan process is complete, you’d get the $1,000 loan amount back plus the very small amount of interest you earned on the CD (less than a dollar).
How Does Self Lender Compare to a Secured Credit Card?
When you’re trying to rebuild poor credit or build up your credit from scratch, another solid option to consider is a secured credit card. With a secured credit card, you pay a cash deposit as collateral and get a small credit limit in exchange. If you put down $500 as collateral, for example, the credit limit on your new secured card is typically in the $500 range.
From there, you use your secured credit card like a traditional credit card, making monthly payments on time as you should. As you make payments and prove you can use credit responsibly, the reporting made to the credit bureaus should increase your credit score over time.
The main similarity between secured cards and credit builder loans through Self Lender is the fact that almost anyone can qualify. Since both options require collateral — presenting little if any risk to the lender — they’re available even if you have bad credit or no credit at all.
Other than that, these two options work very differently. A Self Lender loan isn’t a credit card, and you don’t receive access to a line of credit you can spend. You can also get started without a lump sum of money upfront for a deposit. Instead, you make payments that are saved on your behalf and get your money back in the end.
Either option can be a good one if you have poor credit and can’t qualify for an unsecured credit card, however. So make sure to do some research before you decide whether a credit builder loan or secured credit card is a better fit for your needs.
The Benefits of Using Self Lender
The benefits of Self Lender are clear if you’ve tried to qualify for a loan or credit card but received a denial in the past. Since credit builder loans are secured with your own payments, there’s no credit check required. In addition to easy approvals, here are some of the other benefits you can look forward to:
- Your monthly payments will help build your credit history: Your monthly payments are reported to the three credit reporting agencies, which will help you build credit over time.
- Your money is safe: Your funds are FDIC insured, meaning the money you pay in can’t just disappear.
- Early closure options: You have the option to pay off or close your account early.
- Build savings: You get the cash you pay in at the end of your loan, which means you’re forced into saving money. For a lot of people who struggle to sock away an emergency fund, forced savings is a good thing.
- Free perks: Self Lender offers some additional free benefits such as credit monitoring and score-tracking.
Downsides of Using Self Lender
While building an emergency fund while you rebuild credit is a good thing, there are some downsides to using a credit builder loan — namely the fees involved. Potential disadvantages to consider include:
- High interest rates: The interest rate may be high since Self Lender says they offer rates up to 15.65%. You also have to pay a $12 administration fee to get started.
- Fees for closing your account early: If you want to close your account early, you need to pay the amount of your loan in full or make at least one loan payment then close the account and use the savings in your CD to pay off the remaining balance. Either way, you will need to pay an early withdrawal fee to close your CD. This fee is equal to 90 days of CD interest.
- Late fees: You’ll need to pay late fees equal to 5% of the scheduled monthly payment if you make a payment after your 15-day grace period.
- You could hurt your credit: If you fail to make payments or make payments late, you could actually hurt your credit. Since your payments are reported to the three credit reporting agencies, irresponsible credit use can leave you worse off than when you started the process.
Should You Try Self Lender?
If you’ve made poor decisions with your credit in the past and want another chance to set things right, Self Lender may be the answer you’re looking for. And, if you don’t have any credit to speak of yet, a credit builder loan may be one of the only ways to start building the credit you need (unless someone you know is willing to add you as an authorized user on their credit card account).
Fortunately, there are plenty of benefits that come with using this type of loan. Small loan amounts mean the monthly payments may fit well within your budget, and you get to build credit while you build up a savings account. Whether you want to save up for next year’s holiday gifts or start an emergency fund, if you’re someone who needs to build up some savings and build credit at the same time, a credit builder loan from Self Lender could be a dream come true.
On the flip side, you may also want to consider a secured credit card if you prefer to have a line of credit you can borrow against. Keep in mind, however, that you’ll need an upfront deposit of several hundred dollars to open a secured card. Both options can be good ones, but you should weigh the pros and cons of each and consider your unique needs before you decide.