Using a personal loan for credit building is one way to show a consistent payment history that can lead to good credit scores. Credit builder loans can help you do this even if you have a bad credit history or haven’t yet established credit. There are potential pros and cons to using credit builder loans.

How personal loans help you build credit

Your payment history is the biggest single factor in determining a credit score. You need some record of making payments to establish a credit score. If you consistently make payments on time, it will help your credit score. If you often miss or are late with payments, your score will be dragged down.

Personal loans help build credit because they typically give you a regular monthly schedule with a fixed payment every month. That makes it easy to budget for and manage your payments. When you sign up for a personal loan, you can see exactly how long it will take to pay off the loan and how much it will cost.

Personal loans also help build credit because they are a form of installment debt. That means they have regular, recurring payments. Installment debt differs from revolving credit, which allows you to tap into a line of credit regularly. Most loans are installment debt, while credit cards and home equity lines of credit are examples of revolving credit.

To build credit, it’s best to have a mix of installment and revolving debt. So, if you don’t have any other loans, a personal loan can help you show you can handle installment debt.

How to get a personal loan with bad credit

Of course, the classic problem with establishing or improving bad credit is that it can be hard to get credit unless you have a good credit history. This is where credit builder loans can help.

Credit builder loans are a type of personal loan designed to reduce the lender’s risk and be available to people without a strong credit record.

Not all lenders offer credit builder loans. However, if you search online for them, you should find several options. You can also check with your local community banks or credit unions to see if any of them offer them.

How credit builder loans work

Credit builder loans are different from other loans because the amount you borrow isn’t immediately available for you to use. Instead, the lender will put it in a savings account or certificate deposit on your behalf.

The money in that account is used as collateral for the loan. Lenders are confident in making credit builder loans to people who don’t have great credit because they know the loan proceeds are kept in a secure account.

As with most other loans, you make set payments on a regular schedule – typically over a period of 6 months to 2 years. Part of these payments goes to paying back what you borrowed, and part goes towards paying interest on the loan.

When you’ve repaid the loan, the money put in the secure bank account will be available to you. Meanwhile, the lender will have reported your payments to one or more of the three major credit bureaus. If you’ve made those payments on time, this should help your credit score.

Benefits of credit builder loans

People often feel shut out from credit because no one will give them a chance to prove they can be relied on to make their payments. Credit builder loans can overcome this problem because you don’t need excellent credit to get one.

So, credit builder loans can help you establish credit for the first time. Credit builder loans can also help improve a poor credit score. In other words, they allow people to use a personal loan to build credit even if they don’t have a strong credit history.

Potential drawbacks of credit builder loans

One problem with credit builder loans is that you are paying interest to borrow money without actually getting the use of that money. The proceeds from the loan are not available to you until you’ve made payments on it. It would be more cost-effective to simply put the amount of those payments into a savings account yourself. That way, you’d be earning interest rather than paying it.

Also, the Consumer Financial Protection Bureau (CFPB) found that getting a credit builder loan can make it harder to keep up with other payments. Missing payments on other debts would negate the benefits of making payments on the credit builder loan.

Making a credit builder loan work for you

Here are some tips for successfully using a personal loan for credit building:

• Budget to make all your payments on time. This includes the credit builder loan payments and any other payments you owe. The CFPB found that credit builder loans were most effective in establishing credit and improving scores for people who didn’t have other debts.
• Check who the lender reports payments to. There are three major credit bureaus – Equifax, Experian and TransUnion. To help you build a payment history, the lender must report to at least one of these. Your payment history is most impacted if the lender reports to all three credit bureaus.

As with all credit, you are judged on your payment history. So, it’s vital to establish a positive history.

Alternatives to using a personal loan for credit building

Besides using a personal loan for credit building, there are some alternatives to consider. A secured credit card is another way to establish credit without a strong credit history. As with a credit builder loan, it requires you to commit some money as collateral to build credit. Again, revolving credit and installment loans are two different things, so it’s best to establish a track record with both types of credit.

Loans such as car loans that use a physical asset as collateral are often available to people with less-than-perfect credit. These offer an opportunity to build credit if you can afford the terms. Student loans can also provide an opportunity to establish a credit history.

Whether you use a credit builder loan or another method, getting the chance to build a track record of using credit is just the first step. In the long run, it’s how good a track record you establish that will make the most difference.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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A personal loan is an investment in your future self. Other types of loans, such as mortgages or auto loans, must be used for a specific purpose. A personal loan gives you a greater degree of flexibility. Learning how personal loans work helps you manage personal finances, achieve big goals and be a good steward of your credit.

Basic elements of a personal loan

A personal loan is a type of credit that a bank or online lending institution extends to help you meet a financial goal. These goals might include:

• Consolidating several smaller debts into a single account that’s easier to manage with better payback terms
• Covering an unexpected medical expense
• Funding your continuing education
• Paying for a small to mid-size home improvement project

Personal loans offer flexibility and financing capacity. They can be used broadly and are negotiated between you and a lender. You’ll likely have more credit to spend with a personal loan than a credit card.

This financial tool has clearly defined edges. Your lender determines the interest rate – often fixed – you pay and the period you pay it back.

Types of personal loans

Some personal loans are secured, while others are unsecured. Understanding this principle helps you decide how much risk to take on while meeting your lender’s expectations.

A secured personal loan means if you cannot pay your debt, the lender can take something of value from you. This might include a vehicle, a home or another asset. It gives the lender greater confidence that they can recover their money with interest if your financial situation changes. Secured personal loans often have lower interest rates because of this added financial security for the lender.

If you have limited assets of value, you might opt for an unsecured personal loan. This means the lender gives you funding without collateral backing you up if you cannot pay. To cover its bases, your lender might require a higher interest rate.

Many personal loans offer a fixed interest rate. This helps you predict precisely how much is owed each month. Some personal loans have a variable interest rate, which means you might owe less this month and more next month as the market fluctuates.

Advantages and disadvantages of personal loans

A personal loan can be attractive if you need money to cover expenses beyond your savings. Personal loans are available from various trustworthy lenders, both conventional and online only. You can shop around for interest rates, terms and other criteria that fit your financial situation best.

Personal loans can help you remain calm amid stress. An unexpected medical bill might normally throw off your budget for months. A personal loan could reduce stress because it lets you make payments over time versus all at once.

A final advantage of a personal loan is that you can manage it with other financial accounts. These include checking and savings accounts. You already know the ins and outs of your banking website or app. This can make tracking your personal loan and payoff progress a breeze.

On the other hand, personal loans come with potential disadvantages. Personal loans can become an excuse for spending beyond your means. Never pursue a personal loan unless you have mapped out how it impacts your monthly budget. Know the payback period and plan on fully paying what you owe each month so the loan doesn’t add more stress to your life. Paying extra is even better.

Another downside of personal loans is interest. If you can pay for something with cash savings, it might be best to start there versus opening an interest-bearing personal loan. A small-scale bathroom remodels funded with cash leaves you with a completed project and no debt. By contrast, a personal loan might mean you complete your remodel yet continue making payments for months or years to come.

A third watch-out with personal loans is their possible impact on your credit report and score. People with solid credit tend to have at least a couple of types of debt, so a personal loan can, in theory, be beneficial. Yet it’s important to make timely payments and avoid taking out too much new credit too quickly. Apply for a personal loan only when you understand how it could impact your credit health. Avoid falling behind on payments, which could negatively affect your score, and, in the worst-case scenario, send your bill to collections.

Tips for choosing the right loan and avoiding pitfalls

Several practical tips can help you ensure a successful personal loan experience. These tips include:

1. Identify your need.

Understand why you’re seeking a personal loan. Creatively examine all possible paths for covering that expense. Consider whether you need such a loan or might fund all or part of the cost with cash.

2. Do your homework.

Use Credit Sesame and other free resources to explore the types of personal loans available. Determine who offers the lowest interest rates and best overall terms. Avoid lenders that charge fees that seem unusually high or without a clear explanation. Your job at this stage is to limit risk to your personal finances while meeting a financial need.

3. Place inquiries.

Apply for a personal loan through one or two different lenders. See whose features best fit your need and your budget. Place these requests around the same time to avoid a negative impact on your credit report. An even better option might be to seek preapproval for a personal loan. This might not ding your credit at all.

4. Review proposed terms.

Assuming you qualify, the lender responds with an overview of the personal loan for which you are eligible. Take this opportunity to read slowly and carefully. Understand the interest rate you’ll pay, whether that rate is fixed or variable, and the timeframe for paying back the debt in full. Scan all documents to see whether the lender includes additional fees. Ask any questions to make sure you understand the numbers and your responsibilities once you have the loan. You can ask your financial adviser to take a look and give you a second opinion. Once these steps are complete, and you are sure you want and need a personal loan, you can sign the documents and make the loan official.

5. Use your loan and begin payments.

Once your loan paperwork has been signed, you should have access to funds within a few business days. This enables you to use the personal loan for the expenses you’ve earmarked and triggers the start of your monthly payments. Honor the terms you’ve agreed to and make payments on time.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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You want your special day to be absolutely right. For many couples, the joy of a wedding often competes with the dread of figuring out how to pay for it. According to Zola, a wedding planning website, the average cost of a wedding in 2023 is $29,000 up from $28,000 in 2022. Most people don’t keep nearly $30,000 hanging around and a personal loan can be a helpful option. It can cover expenses, maintain flexibility and keep your budget intact.

What are the benefits of a personal loan for your wedding? How do you choose the right loan? What terms should you consider? How can you minimize overall expenses along the way?

Key benefits of a personal loan to fund your wedding

If you do not love financial drama, a personal loan can save you time and headaches. There are several reasons why.

You have lots of choices with personal loans. Your existing bank likely offers these products. Many more options are available online via personal loan providers.

Personal loans offer flexibility. You can use the funds from a personal loan for a wider range of expenses than for other loan types, such as auto loans (used to purchase vehicles) and mortgages (used to purchase houses). This extends to cover costs such as dress and tuxedo rentals, catering, facility fees, honorariums for your officiant, and so on.

Personal loans offer compatibility. This means a personal loan can pair well with cash savings or a credit card. That provides full-circle financial resources to fund your wedding.

Finally, personal loans generally can be obtained more quickly than other types of loans, such as a mortgage. If you’re newly engaged and holding your wedding in the next few months, the accessibility of a personal loan can help you expedite the planning process.

How to shop for a personal loan to fund your wedding

As with other types of debt, it’s important to consider your financial objectives and personal boundaries when shopping for a personal loan. Keep these criteria top of mind.

• Interest rates. Determine the interest rate and whether it is likely to increase. Ask for a fixed rate whenever possible. This ensures a predictable monthly payment. Most personal loans have a fixed rate, but it’s always a good idea to double-check.
• Term. This refers to the number of months you spend paying off your personal loan. Generally speaking, ask for a shorter term with higher monthly payments so long as you can afford to make them in full. This helps you pay off your personal loan sooner with less interest.
• Fees. Depending on your personal loan provider, you might have additional costs to assess. For example, some banks or online services might charge processing fees or expenses for getting copies of statements via physical mail.

Fund your wedding without breaking the bank

You can plan an incredible wedding without losing sleep over how the dollars flow. Follow a few steps to ensure peace of mind throughout the planning process.

1. Start with the end in mind

Write down a number that represents your preferred all-in wedding cost. Factor in everything, including food, photography, clothing, travel, lodging and everything else. Talk through the full budget with your partner and agree on that target number. No matter how you end up financing your nuptials, it is wise to have a unified purpose and a clear goal to guide the rest of your decisions.

2. Check all your money pots

Options are always an advantage when you’re planning for a big expense. Consider all of the ways you might fund your wedding to keep costs in check and cover all expenses. For example, do you have some cash set aside in savings? Do you have a credit card that could be used for smaller-scale purchases? These can supplement a personal loan and help you focus on borrowing only what you need.

3. Avoid too many personal loan inquiries

From a credit perspective, remember that it’s good to have several types of debt, it’s not good to make too many applications for loans in a short period of time. Do your research and assess all possible lenders before applying for a personal loan. This works in your favor. You apply only for a loan that fits your personal financial situation. And you avoid too many credit inquiries, which can damage your credit score.

4. Evaluate repayment options

Your personal loan specifies exactly what you owe each month. That doesn’t mean you need to stick with the minimum payment, though. Work with your partner to determine if you can afford to pay a little extra. This can help you get out of debt sooner, leaving you basking in the glow of a fully funded wedding.

5. Look two steps ahead

Most big life events have a few unexpected turns along the way. Perhaps that venue is more expensive than you realized. Or maybe additional family and friends plan to attend your after-wedding dinner. Whatever the case, think ahead about the possibility of extra costs or hidden savings. This can give you and your partner the confidence to keep taking the next step in the wedding planning process without extra heartache or heartburn.

Whatever your wedding adventure brings, a personal loan can help you shore up your budget, anticipate the costs and create an experience to remember.

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You might feel angry, disappointed or embarrassed, but it’s not the end of the world. It’s important to understand that lenders tend to focus on different types of borrowers and turn down people who don’t fit their box. One company might reject you while another begs for your business. The roadmap below shows you how to get over rejection, choose the right lender and put your best foot forward.

Step 1: Read your adverse action notice

Your first step after being denied a loan is to read your “adverse action notice.” The Fair Credit Reporting Act and the Equal Credit Opportunity Act require lenders to issue this notice orally, electronically or in writing when they deny your credit application or offer less favorable terms like a lower loan amount.

By law, adverse action notices must contain this information:

• The name, address and phone number of the credit bureau (including a toll-free number for nationwide agencies) that supplied the report.
• A statement that the credit bureau doesn’t make underwriting decisions and can’t explain why the lender declined your application.
• Notice that you have the right to a free copy of the credit report used if you request it within 60 days.
• Notice of your right to dispute the accuracy or completeness of any information on the credit report.
• Your credit score, if a score was used.

The lender is also required by law to provide the specific reason(s) you were turned down for a loan or explain where to get that information (you must request it within 60 days).

Common reasons for loan denial

Once you understand the reason for your loan denial, you can address it. Here are the top reasons lenders deny credit:

• Poor credit history. If your track record with previous lenders features missed payments, charge-offs, collections or other blemishes, future lenders will be reluctant to trust you.
• Insufficient credit history. While having no history is better than bad history, it’s still a big hurdle to overcome. Lenders can’t predict your future behavior without some past behavior to analyze.
• High debt-to-income ratio. Your debt-to-income ratio (DTI) shows lenders how much of your income is available to repay a new loan. If you already owe more than you can safely repay, you may have difficulty borrowing additional funds.
• Spotty employment history. It takes income to pay bills, and if your earnings are inconsistent, lenders worry that you won’t be able to repay your loans. Lenders like to see stable, consistent, healthy income and not big gaps between jobs, frequent employer or industry changes or income that’s dropping.
• Incomplete or inaccurate application. Lenders can’t make a decision if you don’t complete the application and supply all requested documentation.

Don’t be discouraged. You can address these issues, improve your profile, and probably get loan approval.

Step 2: Fix what you can

Once you know why a lender turned you down, you can work to improve your chances.

Credit report errors

Review your credit report for accuracy and correct errors if needed. Contact the company that reported incorrectly or report the error to the credit reporting agency on its website. If your application is for a mortgage, your lender may be able to help you correct errors very quickly by using a rapid rescoring service.

Application issues

Go through your loan application and make sure that you provided complete and truthful information. Look at your debts. Many times, lenders take the balances and payments right off of your credit report. If the actual balances and payments are lower, document them for your lender. Make sure your income is also calculated correctly.

Employment issues

A spotty work history with gaps and changes raises red flags with lenders. There are a few acceptable reasons for such changes, for example being in school, switching to part-time after having a baby, moving for a spouse’s job, or changing careers after completing your education. You may be able to overcome job instability with a stellar credit history, conservative use of debt, or a healthy emergency fund. If you have had job changes in the last two years, try to tie them together to build a picture of steady work doing a similar job or working in the same industry.

Minimum credit score

If your credit score is the problem, you can (and should) work toward improving it over time. But you should also look for a lender with lower minimum credit score requirements. Check your credit score and ask lenders what their guidelines are before applying. Or seek out lenders that offer a loan prequalification without pulling your credit.

Debt to income

If your issue is debt-to-income, you can fix that by paying down debt, increasing your income (side gig?), or choosing a lender that allows higher ratios.

To calculate your DTI, add up your housing costs (mortgage payment or rent) and your monthly debt payments including credit card minimums, auto loans, student debt, etc. Don’t include living expenses like utilities or food. Divide that total by your monthly before-tax income. To approve you, a conservative lender won’t want your DTI over 36%, an average lender maxes out at 43% and a generous one at 50%.

Step 3: How to get a loan with bad credit or high DTI

Of course, you want to improve your financial management and credit score for future borrowing. But what if you need money now?

Consider non-prime lenders

There are lenders and credit card issuers that specialize in riskier borrowers. They might be willing to accept a lower credit score if your income is sufficient to afford the loan. Some personal loan companies are willing to accept credit scores as low as 580 for otherwise-qualified applicants. Shop carefully for non-prime loans because interest rates and terms vary wildly. Make sure you can afford the payments and that you have a plan for paying off the loan. Missing payments can drag your credit score even lower and get you into more financial trouble.

Pledge collateral

Loans backed by collateral that the lender can take are less risky to lenders. You may be able to get financing by pledging something valuable like real estate, a car, electronics or jewelry. Beware of auto title loans, however. They often have extremely high rates and your balance increases very quickly if you don’t repay it right away. You can even lose your vehicle.

Get a co-borrower or co-signer

If you have loved ones with good credit, you might be able to bring in a co-signer or co-borrower. Lenders consider all applicants’ income and debts, so another borrower can help if your income is low. And adding someone with better credit to the application could get you a better deal.

However, co-signing or co-borrowing can be extremely dangerous for your friend or family member. If you miss a payment, it will likely hurt their credit score. If you default on (don’t pay) your loan, your lender may pursue your loved one for payment, even into court if necessary. Co-signing also creates contingent liability for your cosigner, which means they might have to pay your debt. This can make it harder for them to get credit in the future. If your friend or relative is willing to take this on, cherish them and do not abuse their trust. Such a relationship is worth more than any amount you can borrow.

Does being declined for a loan hurt your credit score?

Being denied credit does not directly harm your credit score. Lenders do not report their underwriting decisions to credit bureaus.

That said, applying for credit triggers a “hard” inquiry when the lender pulls your credit report, and a hard inquiry causes your credit score to drop a few points. So-called “soft” inquiries happen when you check your own credit or prequalify for credit without applying. Soft inquiries don’t harm your credit score.

So, if you apply for loans everywhere and get denied repeatedly, you have a batch of hard inquiries. Statistically, consumers with at least six inquiries are eight times more likely to go bankrupt, so they raise red flags with lenders. It’s smart to prequalify for loans without a hard inquiry or ask lenders what their guidelines are before applying for credit.

How long do inquiries hurt your credit score? They remain on your credit report for two years but only impact your score for 12 months.

Understand that credit bureaus treat inquiries for auto loans and mortgages differently. That’s because you often don’t know what interest rate and terms you may be offered until you apply. And it’s common for consumers to apply with several lenders when shopping for financing. So as long as you do your shopping within a short timeframe (14 to 45 days depending on the scoring model version), your credit score reflects only one inquiry.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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When you need extra money, there are several options you can consider, including using a credit card, tapping into home equity or a personal loan. Often people use a personal loan as a way to access cash quickly, often without putting up any collateral.

It’s a good idea to time your personal loan application wisely and understand your financial situation before committing to this type of financing.

Understanding personal loans

A personal loan is a form of financing that is typically unsecured. Unsecured means it does not require putting up any collateral like your home. Instead, only your signature is needed if you qualify.

Some lenders, however, offer only secured personal loans, which can put your home or another form of collateral pledged at risk if you do not repay your debt.

The good news about personal loans is that they are commonly paid back over 24 to 60 months, a relatively short period.

The fixed interest rate on a personal loan can be higher (usually over 10%) than for many other types of loans, although rates are typically lower than a credit card would charge. For example, a borrower with a credit score above 720 may be charged less than 12.5% interest for a personal loan compared to the average new credit card APR of 22% (in December 2022).

“Because there is usually no collateral required, a personal loan requires a higher credit score and can be more difficult to obtain than a secured loan such as a mortgage or car loan,” says Laura Sterling, vice president of marketing for Georgia’s Own Credit Union.

The money borrowed is paid in a lump sum at closing, and personal loan funds can be used for virtually anything, including home improvements, debt consolidation, medical expenses, and big events like a wedding.

Good candidates for a personal loan

According to Brian Greenberg, CEO/founder of Insurist, a worthy prospect for a personal loan is someone with a steady income and a good credit score (720 or higher).

“Not only does that mean you should have the ability to pay back your loan, but it also means you are more likely to be approved for the loan in the first place,” he says.

A bad candidate for a personal loan is someone who has little or no income or whose income fluctuates widely.

“This person is unlikely to be able to repay their debt, which could lead to defaulting on their payments or even bankruptcy,” Greenberg continues.

Why timing your personal loan is important

Knowing the ideal time to apply for a personal loan is important. You would be wise to apply when your creditworthiness and credit score is high. It’s a good idea to ensure you are in a strong financial position to repay your loan on time, as agreed.

“It can be hard for individuals to perfectly time when they should take out a loan. So it’s important to have an idea of what you need the loan for and when you need it so that you can make sure it can work for you,” says Shawn Plummer, CEO of The Annuity Expert and a certified financial professional.

Furthermore, unsecured personal loans start charging interest immediately, so it’s wise to be sure you get the loan at the right time.

“Getting your personal loan too early means you’re already paying for the loan and paying interest before the money starts working for you. Getting the loan too late means you can’t use the money for what you needed it for,” adds Plummer.

There are “bad times” to apply for a personal loan, such as when you lack the means to repay your debt comfortably.

“What you are using the personal loan for is more important than timing. For example, if you are planning to use loan funds for emergency expenses like a needed operation, it can still be worth it. But if you are considering a personal loan to pay for something that is not a necessity – like a vacation – it may be better to wait for lower interest rates,” suggests Sterling.

When is a good time to take out a personal loan?

The truth is, there is no “best time” to apply for a personal loan. The answer depends on your financial circumstances and money needs. You could always wait things out hoping that personal loan interest rates drop, but trying to time the rate market is often a lesson in futility. After all, rates can rise even higher; meantime, you’ve postponed pursuing money you need sooner not later.

Still, Plummer recommends applying for and taking out a personal loan a little before you need the funds but not more than a month ahead of the latter.

“Remember – if you take out a personal loan too early, you will start paying for it before getting use out of it,” he says.

If you apply for a personal loan at a time when your credit score is high, you are more likely to get a better interest rate. That’s why Sterling recommends reviewing your credit reports and working to improve your credit score well before applying for a personal loan.

If your financial health is in question, it is probably not a good time to consider applying for a personal loan.

“If you’ve just lost your job, it’s not the best time to apply. On the other hand, if you’ve just had an increase in income, that could be a great time to apply for one,” advises Greenberg. “You’ll also want to consider whether or not you have any outstanding debt on credit cards or other loans before applying for a new personal loan. It’s probably not wise to take out another loan until those debts are paid off first.”

Do your homework and shop around for financing options carefully. Compare loan offers and interest rates to get the best deal possible. You may end up choosing a different form of financing than a personal loan after performing the necessary due diligence.

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