These Loans Aim to Help Borrowers Build a Credit History

“Folks spend what they make, and maybe more,” said Mike Lord, chief executive of the North Carolina State Employees’ Credit Union, which for years has offered credit-builder loans to its members to help them avoid payday lenders.

Credit-builder loans offered by many credit unions typically make at least some of the money available right away, since borrowers are often seeking the loan because of a cash crunch. “They need cash now,” said Ann Solomon, vice president of strategic initiatives at Inclusiv, a nonprofit that assists credit unions serving low-income neighborhoods. Doing so, she said, can help people avoid becoming repeat borrowers.

Funds borrowed through start-ups like Credit Strong, however, aren’t available immediately and aren’t intended for emergencies. Rather, they’re to help build savings for expenses down the road. “This is not for somebody who needs cash tomorrow,” said Erik Beguin, chief executive and president of Austin Capital Bank.

Typically, customers pay a modest upfront fee as well as paying interest on the loan. The savings account (or, in the case of Self Lender, a certificate of deposit) is held at a bank that’s insured by the Federal Deposit Insurance Corporation, earning minimal interest.

Borrowers must be at least 18 and have a debit card or bank account to make loan payments. The start-ups don’t check credit scores, as would happen with a traditional loan, but they do take steps to verify a borrower’s identity and to screen for fraud. Self Lender reviews an applicant’s history with ChexSystems, which can flag a pattern of trouble with bank accounts. Credit Strong says that it doesn’t disclose details of its review process because of “competitive and security reasons,” but ChexSystems “will not adversely affect approval” of applicants.

Self Lender is available nationwide. Credit Strong is currently available in all states except North Carolina, Vermont and Wisconsin.

Here are some questions and answers about credit-builder loans:

What sort of interest rates do credit-builder loans charge?

Rates are typically double-digit — higher than the rate on a secured loan like a mortgage, but lower than some credit card rates. According to Credit Strong, someone borrowing $495 over 12 months would pay $44 a month plus a one-time $8.95 fee, at an annual percentage rate of just under 16 percent. At the end of the loan term, the borrower would have $495 in the savings account, plus any accrued interest. In contrast, rates on payday loans are often triple-digit.