Should You Get A Starter Loan?
Have you ever applied for a loan before? Is your credit score looking worse for wear?
If you answered yes to any of these questions and need to borrow money, a starter loan might be best for you.
A starter loan — sometimes called a credit-starter loan — is a personal loan for people with no credit or bad credit. Banks often promote these types of loans as an easy way to build credit.
On the other hand, a credit-builder loan is a different type of loan. Here, borrowers don’t secure the loan until they pay it off in full, typically in monthly payments.
The similarities and differences between each type of loan depend on the lender and state. Ultimately, they’re both a way to help people with thin or low credit finance a purchase.
If you want to learn more about starter loans, Credit Karma explains.
What Is A Starter Loan?
Terms and conditions vary from lender to lender. However, the basic concept is that borrowers have a chance to build their credit through on-time payments with a low-risk personal loan.
Starter loans have several features, such as:
- Small loan amounts that range from $100 to a couple of thousand dollars.
- Some qualification criteria, depending on the lender. You may need to provide proof of income, show a history of on-time bill payments, or meet possible age requirements.
- Lower interest rates — but not always.
Additionally, some banks require borrowers to deposit collateral, which is known as a secured loan. When you repay the amount that you borrowed, the lender returns your money. However, not every starter loan requires this.
When Should You Get A Starter Loan?
There are a few reasons why you may want to get a starter loan, like if you needed to build your credit to secure a loan to finance a big-ticket purchase. Suppose you know you will eventually need to get a new car or plan on buying a house. In this case, getting a starter loan and making timely payments for the term’s length will improve your credit and show lenders your creditworthiness.
Before you apply for a starter loan, consider these three things:
- Is payment activity reported to the three major credit bureaus? If it doesn’t, it won’t do anything to help your credit.
- What is the APR?
- Is there collateral? If you think there is even a chance you could miss a payment with your current income, avoid loans. You don’t need the added burden of monthly payments to stress your budget.
Starter Loan Alternatives
Here are other options to consider before you apply for a starter loan.
Use Cash, Rather Than A Loan
Is the purchase you have in mind something you need now? If it is something discretionary, consider saving and paying in cash. This way, you don’t have to pay extra in internist or deal with the added stress of missed payments or hurting your credit. The downside is that cash doesn’t help you when you want to build credit.
Get A Co-Signer
If you have a trusted friend or relative who qualifies for a loan, consider asking them to co-sign on a loan with you. Keep in mind that a co-signer is liable for payments if you can’t afford them, so make sure you both understand the implications before moving forward.
Getting a co-signer allows you to get approved for a starter loan so you can still build your credit while paying back the money you borrowed.
Get A Secured Credit Card
Like a secured loan, lenders require a minimum deposit to open a secured credit card account. Card providers typically report your history to the credit agencies, so you can build your credit when you use your card responsibly — just make sure they do report. Eventually, you can upgrade to an unsecured credit card.
The downside is that secured credit cards usually have smaller credit limits, and you have to pay a deposit.
After You Get A Starter Loan
When you get approved for a starter loan, focus on paying each statement on time so you can build your credit. Additionally, make sure to periodically check your credit report to ensure the loan is there, and the lender is reporting your payments. Keep in mind that it could take a few months for the new loan to appear in your report.
- Brodsky, Sarah. “Starter Loans for Credit Building.” Credit Karma, 7 Nov. 2020, www.creditkarma.com/personal-loans/i/what-is-a-starter-loan.