If you have no credit or — worse — bad credit, establishing a good credit reputation can seem impossible, because no one will approve you for a card or loan.
Company co-founder and CEO James Garvey says he wanted “to create a simple way to establish credit history for the first time.” He noted that credit-builder loans — long offered by some credit unions and community banks — “have been proven to help people establish credit history.” But Self Lender is the first such product that’s widely available online.
Credit-builder loans versus secured cards
With a credit-builder loan, the amount you borrow does not come to you right away. Instead, it’s held until you make all the payments and then released to you.
A credit-builder loan is different from a secured credit card in two important ways:
- You don’t need money upfront to get the loan, though you do need to be able to afford the monthly payments. (With a secured card, your credit limit generally equals your deposit.)
- You cannot access the money on deposit until the loan is paid off. (With a secured card, you can use up to your credit limit anytime — though doing so will increase your credit utilization and hurt your credit score until the balance is low again.)
How do you decide between a credit-builder loan and a secured credit card? You don’t have to. You can use both.
“Having both types of credit — revolving and installment — can help build your scores faster,” says NerdWallet personal finance columnist Liz Weston. “The scoring formulas like to see that you can handle different types of credit responsibly.”
How Self Lender works
Once you’re approved by Self Lender, the loan amount is deposited in a certificate of deposit with the firm’s partner, Austin Capital Bank. You’ll make regular payments for a year, then have access to the money.
Self Lender differs from other credit-builder programs because you can only borrow one amount — $1,100 — and all loans have one-year terms. Self Lender does have plans to offer credit-builder loans in other amounts in the future. (It’s also worth noting that borrowing a higher amount is not necessarily better for your credit score.)
Over the yearlong loan, you’ll pay $98 per month at an interest rate of 12.52%. That’s a total of $76 in interest, but you’ll also earn about $1.10 in interest on the certificate of deposit. That means you’re spending about $75 to see the beginnings of a good credit score.
When the loan is paid off, you have access to the $1,100 on deposit. That’s the start of a great emergency fund, and Self Lender will encourage you to keep salting away that $98 a month, either in a higher-yield CD or a savings account at its partner bank.
During the repayment period, you have access to free credit monitoring and a VantageScore produced by TransUnion, so you can track your credit score’s progress. Self Lender reports your payments to the three major credit reporting agencies (note that late payments are also reported, so they would hurt the credit you are trying to build). After about six months, the repayment activity should generate a FICO score if you didn’t have one previously; VantageScores can be generated sooner.
If you decide to close your account before it’s paid off, you can access the money in the CD (which is FDIC-insured), minus the amount you still owe.
How to apply for a Self Lender loan
The loan application is submitted online via Self Lender’s website. The loans are open to residents of all 50 states.
To qualify, you must be at least 18 years old, have a Social Security or taxpayer identification number, and have a bank account or debit card (a prepaid card is OK — a traditional bank relationship isn’t a requirement). You can’t have had a negative ChexSystems report, such as bounced checks or unpaid fees, in the previous 180 days.
Self Lender fees and penalties
Payments 15 days late or more incur a fee of 5% of the scheduled monthly payment. They are not reported late to the credit bureaus until they are 30 days late.
If you are 80 days late, the account is closed and the loan is reported as “defaulted” on your credit reports. You get the loan deposit amount, minus the fees and amount you owed when the account closed.
There is no early termination fee.
An option for building credit
Right now, Self Lender is a brand-new operation without a track record.
Credit-builder loans, though, have a long history — but they aren’t always easy to find. While some credit unions and community banks offer credit-builder loans, you may need to meet additional criteria, such as living in a certain geographic area or having been a member for a certain minimum amount of time.
Whether you use Self Lender or a credit union’s credit-builder loan, building credit by saving money rather than spending it leaves you with a nest egg and a habit of tucking money away. That’s a smart way to start your financial life.
Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: email@example.com. Twitter: @BeverlyOShea.
Image via iStock.