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Credit Builder Loans

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What Is a Credit-Builder Loan?

A credit builder loan is an excellent way for someone with either little to no credit or someone with extremely poor credit, to either build a credit history or rebuild a broken one. Many lenders offer credit builder loans as a way to build or repair a credit history as an alternative to taking on debt in the form of a credit card or a personal line of credit.

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Learn More About Credit Builder Loans

There are plenty of loans that can help someone build credit. Some common loan types that build credit are auto loans, mortgages, student loans, personal loans, installment loans, and credit builder loans

What is a credit builder loan?

When you take on a credit builder loan, you are essentially making payments towards a savings account that a lender sets aside for you. Once you reach the predetermined amount, the total amount, and typically some or all of the interest you paid, is returned to you in one lump sum. The predetermined amount is agreed upon between you and the lender when you apply for the credit builder loan. You then will agree upon the length of the repayment period.
As you make the monthly payments on time each month, the lender will then report each on-time payment to all three credit reporting agencies. Some credit builder loans may require interest payments whereas others may not. If the lender charges interest on the loan and calculates that interest into your monthly payments, the lender may either return all or part of the interest once the loan repayment period ends and the total goal amount is achieved. Be sure you understand the complete terms and conditions of the start loan before you begin to ensure you understand the interest portion of the loan specifications.

Do personal loans build credit?

Yes, when someone takes out a new personal loan, they are adding to their overall debt, however, they are also potentially diversifying their credit mix as well as establishing a payment history. As the loan continues to be paid, and the monthly payments are being made on time and in full, then a person can build a positive payment history while they lower their overall debt amount. Payment history accounts for 35% of a person's credit score, therefore, a personal loan that shows a 100% positive payment history, that is eventually paid in full, can do wonders to help an individual build their credit profile.

Do all loans help build credit?

Yes, most, if not all loans help to build some sort of credit by allowing a borrower to establish a payment history. However, loans can sometimes do the opposite of helping to build credit. Sometimes they can help to destroy credit. If a borrower decides to take on a personal loan and they begin to submit late payments, miss payments, and/or eventually default on the loan, the borrower's actions can be disastrous on a credit report. A loan default can drop someone's credit score on average anywhere from 90 to 110-points. Additionally, the loan default may appear on a credit report for up to 7-years making it extremely difficult to obtain new credit in the future.

What types of loans build credit?

There are plenty of loans that can help someone build credit. Some common loan types that build credit are auto loans, mortgages, student loans, personal loans, installment loans, and credit builder loans. Also, using a revolving line of credit like a credit card or a personal line of credit can also build credit as long as all payments are made on time and as long as debt balances are kept below 30%.

How do you find the best credit builder loans?

While it’d be nice for a one-size-fits-all financing option, we all know that’s not the case. With credit, we all have to start somewhere, and that’s where credit builder loans can come in handy. Here are a few tips that can help you find the best credit builder loan for your situation. 

  • Consider the cost: Loans can come with fees and interest expenses. While lenders often try to hone in on a monthly payment, consider the total cost of the loan. Is it worth it or are there better options available? You don’t want to overthink decisions, but you do want to think things through and research to make educated and well-thought decisions. 
  • Check reviews from previous customers: You want to ensure you’ll get good customer service when you need it. The best way to confirm that beforehand is to read reviews from previous customers. Additionally, when getting loans online, you’ll want to make sure you are working with a trusted lender.
  • Review your budget: Part of a successful credit builder loan is repaying it on time. Make sure you can budget the payments and keep up with the loan.

Is a credit builder loan worth it?

There are many scenarios where a credit builder loan may be a good idea. Being proactive about establishing credit can help you later in life when you may need credit. As with any loan, just be sure to understand the terms before committing. If you are trying to boost your credit score or build credit, then finding a credit builder loan can expedite your financial journey and achieve your goals. Credit builder loans are designed to be straightforward, but you should understand loans and how they work. Credit builder loans usually differ in the sense that you make fixed payments to the lender and receive the funds back at the end of the loan. Therefore, it’s not really a loan. If you truly need to borrow money, and want to multi-purpose it as a way to build credit, you may need to consider a different option such as a personal loan or credit card.

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What can I do with a $10,000 personal loan?

A $10,000 personal loan has a number of uses, including (but not limited to):
Home improvement Buying a car Wedding costs
Debt consolidation Medical bills Startup business costs

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What is the minimum credit score needed for credit builder loans?


Credit builder loans are primarily targeted toward individuals with low credit scores or limited to no  credit history. As a result, some credit-building loans do not have a specified minimum credit score requirement. The type of loan you use to build your credit can influence requirements as well. At Acorn Finance our network of top national lenders specialize in personal loans. Offers will be more likely to be returned for borrowers with fair, good, average, or excellent credit. Most lenders on the Acorn Finance platform have a credit score cutoff of 600 or above. If you are unable to qualify for a traditional loan to build credit, you may need to explore the avenue of an actual credit builder loan. Banks and credit unions can offer these types of loans, but credit score requirements can vary.

What is the fastest way to build credit?


Building or rebuilding your credit score can be a challenge, but it's definitely achievable with patience and time. The good news is that you can prove your responsibility as a borrower by making timely payments and keeping your credit utilization low. Consistency is crucial, so only borrow what you can afford to pay every month and stay within your budget! With dedication and some consistency, you’ll see that you can improve your credit score and achieve your financial goals.

How can I begin building credit?


Everyone has to start their credit journey somewhere, and getting a credit-building loan is a great way to get started on the path to smart financial choices. Aside from getting a credit builder loan, you can consider getting a cosigner with good credit or becoming an authorized user on someone else’s account. The goal is to show that you can be trusted with the financial responsibility of major accounts and loans.  

To get a credit score, FICO requires at least one credit account that’s been open for at least six months. Once your new account is open that long, you can monitor your score and continue to build credit with on-time payments, responsible borrowing and staying current on your accounts. 

What ways can you build credit?


If you’re ready to start building credit, here are a few suggested options: 

  • Try a beginner or secured  credit card: Some banks can offer credit cards made just for those with no credit. They can be either secured or unsecured, and your usage is reported each month to the credit bureaus. This can help you start to establish credit and allow you to upgrade to a better or larger account eventually. 
  • Be added as an authorized user:  If you have a family member who trusts you, you can see if they’ll add you to their account as an authorized user.
  • Pay your utility bills: If you pay your own bills, some companies can report your payments to the credit bureau, which will help you establish your credit.

How many points will a credit builder loan raise my credit score?


It is estimated that a credit builder loan could raise the average credit score of a person who has little to no previous credit history or debts by 60 points when compared to people with similar credit profiles who did not take out a credit-builder personal loan.

Do banks offer credit builder loans?


Yes, some banks may offer credit builder loans, however, they may be more common among smaller financial institutions like credit unions and community banks. There are some online lenders who may offer credit builder loans as well.

How does a credit builder loan work?


When you apply for a credit builder loan, the lender places that amount into a savings account for you. For example, you could apply for a $2,000 credit builder loan. You and the lender then determine a loan term and split the $2,000 into monthly payments. The lender may or may not charge interest on the loan, and if they do, they may keep a portion of the interest as payment for services or they may return all of the interest paid back to you once the loan term is complete. This detail can vary by lender, therefore it is extremely important you understand all the conditions of the credit builder loan before signing.
Let us say you take out a credit builder loan for $2,000 over 12-months with a 10% interest rate. Each month you can make the monthly payments of $183.33 to the lender, and at the end of the 12-month repayment period, you should have reached around $2,200. It is at this point that the lender may wire you the $2,200, or they may wire you a less amount no less than $2, 000 if part of the conditions of the credit builder loan is that the lender gets to keep a portion of the $200 of interest accumulated as a service fee. At the end of the 12-month period, you should have 12-months of successful and positive payment history that should have helped boost your credit score enough that you may be able to qualify for a different line of credit on your own.

Do you lose money with a credit builder loan?


Each lender is different and the terms and conditions of credit builder loans can vary. Some lenders may want to keep a portion of any interest paid on the credit builder loan as a payment for their services. Always check with the lender to understand what their credit builder loan program entails before signing onto one.

How long does it take to build credit with a credit builder loan?


Typically, it can take a minimum of 6-months of payment history and/or credit activity to establish enough history to impact your score. If you only have a small credit builder loan, you may not see much of a change but it should lay the path to qualify for other types of credit. Establishing a good credit score requires awareness and attention. No effort you make is worthless, so keep making good financial decisions and working on boosting your score.

Why choose Acorn Finance for credit builder loans?


When you work with Acorn Finance, you’re more than just a transaction. We believe in giving you a full picture of your credit and lending options, so you can make the right choice when it comes to getting a credit-building loan. By using our simple and secure platform, you can receive offers in seconds with no impact to your credit score. The opportunity to get prequalified quickly and without credit score impact can help you expedite your financial journey and build your credit.

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