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How a Personal Loan Can Help Rebuild Credit

Personal loans, like any other type of credit line, appear on your credit report. That means that a personal loan, handled well can help improve your credit score. Handled poorly, it can cause your score to drop.

If you have poor credit and want to change that, a personal loan can help you do so.

Learn how personal loans can help build your credit and find out the proper situations for opening a personal loan to build credit.

Pros and Cons of Unsecured Loans vs. Secured Loans

Unsecured Loans Secured Loans
Pros
  • Great option if you are trying to consolidate existing debts
  • Does not require any kind of collateral so there is less risk for you
  • Usually only takes at most a few days to receive funds
Pros
  • Easier to qualify for if you have lower credit and/or lower income
  • Often lower interest rate than unsecured loans
  • Typically can borrow a larger amount
Cons
  • Interest rates can be higher than secured loans
  • Harder to qualify for
  • Lower lending limits
Cons
  • You put your own assets on the line so you're at risk to lose more
  • Application process may take longer which could lead to more fees and longer waiting period
  • If you use savings as collateral, that money becomes unavailable for the duration of the loan

Secured Personal Loans

A secured personal loan is a personal loan where you offer some collateral to the lender. Typically, personal loans are made to you directly, with just your word and trustworthiness backing them.

With a secured loan, there is more than just your word backing up the loan.

When you take out a secured personal loan, you give something of value to the lender. This could be cash, the title to your car, or something else.

If you make your payments on time, the lender will be happy and you get to keep your collateral.

If you don’t make payments, the lender could repossess your collateral to make up for the lack of payment.

When to use them

So why would you want to get a secured personal loan when you can get one without offering collateral? There are a few reasons.

The most obvious is that you actually can’t get an unsecured personal loan.

Because there’s nothing backing the loan, unsecured personal loans are risky. You have to have good credit to qualify for one.

Unsecured loans are much easier to qualify for. So long as you can show you can make payments and can offer the needed collateral, you’re very like to get the loan.

Even if you can’t make the payments, the bank doesn’t lose out because it has your collateral to cover the loan. That means they’re far less risky for lenders.

Another reason is that secured loans have lower interest rates than unsecured loans

This is, again, thanks to the reduced risk. Lenders don’t need to charge as much because they won’t lose as much on their portfolio of secured loans.

These features, the lower cost, and easier qualification requirements make secured personal loans great for rebuilding credit. This is why they often offered as "credit builder" loans.

Where to find them

Most often, you can find secured loans are banks, especially the bank you keep your accounts at.

It’s easy to get a secured loan from the bank you work with because the cash in your accounts can act as the collateral.

A hold will be placed on the funds that serve as your collateral, but you can use the rest as normal.

Examples of Secured Loans vs. Unsecured Loans by Lender

Lender Secured Loan Unsecured Loan
TD Bank
  • Use your TD savings, Money Market Savings, or TD Bank CD as collateral
  • Variable interest rate
  • $50 origination fee
  • Loan amounts from $5,000 - No maximum
  • No collateral required
  • Fixed interest rate
  • No origination fee
  • Loan amounts from $2,000 - $50,000
Wells Fargo
  • Use your Wells Fargo CD or Wells Fargo Savings Account as collateral
  • Loan amounts from $3,000 - $250,000
  • $75 origination fee
  • No collateral required
  • Loan amounts from $3,000 - $100,000
  • No origination fee
PNC Bank
  • Requires non-real estate entities as collateral
  • Loan amounts from $2,000 - $100,000
  • Fixed interest rate
  • No collateral required
  • Loan amounts from $1,000 - $25,000
  • Fixed interest rate
M&T Bank
  • Use your M&T CD or M&T Savings Account as collateral
  • Loan amounts from $2,000 - $100,000
  • Fixed interest rate
  • No collateral required
  • Loan amounts from $2,000 - $25,000
  • Fixed interest rate
  • Unsecured Personal Loans

    Unsecured loans are very similar to secured personal loans, without the need for collateral.

    That means that the only guarantee that the lender has that you’ll make the payments is your word.

    To get an unsecured personal loan, generally, you should have good credit to convince the lender to trust you.

    When you apply for an unsecured personal loan, you only need to prove your ability to make the monthly payments on the loan.

    If you can make payments, and your credit score is good enough, the lender will offer you a loan. The money will be deposited into your account, after any fees, and you’re free to use it as you wish.

    You can find unsecured personal loans all over. They’re much easier to administer than secured loans due to the lack of collateral requirements.

    You can get them from online banks, local banks, credit unions, online lenders, and other places. Payday loans are technically unsecured personal loans, though their exorbitant fees make them a bad choice for consumers.

    How Personal Loans Can Help Rebuild Credit

    A personal loan will appear on your credit report, just like any other borrowing you do. Your credit report can be thought of like a school report card, grading you on how well you handle debt.

    From your credit report, rating agencies will calculate a credit score for you, based on a number of factors.

    Personal loans help influence a number of aspects of your credit score.

    On-time Payments

    How good you are at making payments in a timely manner is the single most important aspect of your credit. You can have a perfect report in every other area, but if you miss payments, your credit score will be bad.

    Unfortunately, this is the hardest thing to influence in the short term. Your credit report will contain information on the last seven years of late payments. Having just one can put a huge dent in your credit score.

    Thankfully, the older the late payment, the lesser the effect it has. If you take out a personal loan and make on-time payments consistently, it can provide a boost in this area.

    Total Credit Limit

    Lenders like to see that other lenders trust you. Think about it this way, if a friend of yours introduced you to someone new, and claimed they were trustworthy, you’d be more likely to trust the new person than if you had met him without the introduction.

    Credit works similarly. If you’ve had loans or large amounts of credit extended to you in the past, it looks good on your credit report.

    What can cause issues if you have a lot of credit available and are maxing it out. Asking for more loans when you already have a lot of debt is a red flag.

    A personal loan increases the amount of credit available to you but also increases how much you’ve borrowed. As you pay the loan down, you’ll see a bump in your score.

    Credit Mix

    Lenders want to see that you can handle different types of debt. If you’ve only ever had a credit card, there’s little way for a lender to know how you’ll handle a mortgage, for example.

    A personal loan is a unique type of loan that will improve your credit mix, thus improving your credit score.

    What to Look for in a Loan for Rebuilding Credit

    When you’re looking for a loan of any type, for any reason there are a few things you should look for.

    The biggest things to look for are low interest rates and low fees.

    These both directly impact how much you’ll pay over the life of the loan. There’s no reason to pay more for a loan when you could have paid less. So, look for the lowest rate and fees you can.

    Also, look for loans of a term that works for you. The term of a loan is how long it will take to pay off.

    Long terms have lower monthly payments but higher total costs. Short terms have high payments and lower costs. Strike a balance between the two.

    When the purpose of a loan is primarily to rebuild credit, look for the lowest rates, fees, size, and term possible.

    You want to show you can handle a loan without spending any more than necessary. Ideally, you won’t need to take out a loan just to build credit and will instead take a loan for another purpose, and use it to rebuild credit at the same time.

    Available Terms and Fees From Top Lenders

    Lender Name Available Terms Origination Fees Late Fees
    LendingClub 3 - 5 years 1.0% - 6.0% 5% of the unpaid
    amount or $15,
    whichever is greater
    Citibank 3 - 5 years None Varies among borrower
    Avant 2 - 5 years 1.50% - 4.75% $25 if not paid
    in full within 10 days
    Marcus 3 - 6 years None None but late payments
    lead to higher
    interest accrual
    Upstart 3 - 5 years 2.8% - 8.0% 5% of the unpaid
    amount or $15,
    whichever is greater

    Are Personal Loans the Best Choice?

    Personal loans are a good choice for borrowers with poor credit for a number of reasons.

    Secured loans can be easy to get provided you can offer the collateral, and they come in all sizes. Some companies will lend you as little as a couple of thousand dollars, or as much as $25,000 or more.

    They also have much lower interest rates than other types of loans, such as credit cards. Finally, they can also be used for nearly anything.

    One great way to rebuild credit with a personal loan is to use it to consolidate other debts.

    If you have multiple credit cards, take out a personal loan to pay them all off. You’ll probably reduce your interest rate and you’ll go from having a bunch of payments to make each month to just making one.

    One con of personal loans is that they can involve a lot of fees.

    Origination fees, which come out of the amount that gets deposited when you are approved for a loan, are common. Providing collateral for a secured loan can also be annoying.

    The biggest con of using personal loans to rebuild credit is that you’re paying money, in the form of fees and interest, to improve your credit score.

    You should look for free credit improving options before resorting to one that costs money.

    Personal Loan Calculator

    Consider Using a Secured Credit Card

    A secured credit card could be an alternative to a personal loan.

    Like a secured personal loan, you must provide collateral, usually in the form of cash. The amount of collateral you provide directly affects your credit limit. Often, if you provide $500 in collateral, your limit will be $500.

    What makes these a good choice is that you won’t pay interest unless you carry a balance.

    The best way to use a secured card to build credit is to use it to make small transactions. Then, pay the balance in full each month. After six or twelve months of having the secured card, many lenders will let you upgrade to an unsecured card.

    You can get secured credit cards from many lenders, but your bank is probably the best place to start looking.

    Conclusion

    Personal loans may not be the obvious option for many people who are trying to rebuild credit. But, it certainly is a viable method.

    When it comes to improving your credit, you just need a credit line that reports your good behavior to the U.S. credit bureaus. A personal loan does just that if you've exhausted other avenues.