What is a credit-builder loan and how does it work?

A credit-builder loan is designed specifically to help people with no credit or damaged credit establish a positive payment history. Unlike traditional loans, you do not receive the money upfront. Instead, the lender deposits the loan amount into a locked savings account. You make fixed monthly payments over 6–24 months, and those payments are reported to the credit bureaus. At the end of the term, you receive the saved amount (minus fees and interest). The monthly payment amount is typically $25–$150. Credit unions, community banks, and CDFIs commonly offer them. After completing a credit-builder loan with on-time payments, borrowers typically see significant credit score improvements.