A Guide to Credit Builder Loans

What Is a Credit Builder Loan?

A credit builder loan is a type of loan designed to help build your credit score.

It’s generally utilized by borrowers who either lack a credit history or are looking to repair a tarnished credit score.

A high credit score is vital if you’re on the market to obtain financing.

This could be in the form of a credit card, auto loan, mortgage or other type of personal loan.

Without a good credit score, it can be a challenge to persuade lenders to approve your application.

A credit builder can be a great tool to help you establish a solid credit standing.

How Does a Credit Builder Loan Work?

A credit builder loan is an exceptionally unique credit product in that you don’t receive any funds from your lender upfront.

Instead, the lender places the money in a secured account, where it remains for the duration of the loan term.

You then contribute fixed monthly payments – with interest – to pay off the balance.

Once you’ve paid off the loan in full, your lender will allow you access to the funds.

Depending on the lender’s policy, you may earn interest on your deposits.

To acquire a credit builder loan, you’ll need to show proof of income to your lender, as they’ll be primarily concerned with your ability to service the monthly payments.

No credit check or deposit is required, and you don’t have to pledge an asset as collateral.

Once you have secured approval from your lender, they’ll set you up with your own savings account, where you will deposit your monthly loan payments.

They will report each on-time payment you make to the credit bureaus, which will serve to build or improve your credit score over time.

Remember: a credit builder loan still works like a standard loan in that any late payments can damage your credit score, so ensure you don’t fall behind.

Most credit builder loans are typically small, and range anywhere from $1,000 – $5,000, though some financial institutions offer ones for up to $25,000.

The loan terms span 6 – 60 months, and interest rates typically range from 20% – 30%.

Credit building blocks

Credit Builder Loan Options for Canadians

If you’re looking for a lender to get you started with a credit builder loan, here are a couple of options to consider:

Option 1: Refresh Financial

Launched in 2013, Refresh Financial is a financial services firm that offers an affordable credit building loan for those looking to improve their credit score.

The company was acquired by digital lender Borrowell in early 2021. 

To get approved for a credit builder loan, you need to satisfy the following eligibility criteria:

  • Be at least 18 years of age 
  • Have a bank account
  • Be a Canadian resident
  • Have a minimum income of $1,000 per month

You’ll need to supply several documents as well, including your employment information, banking details, and proof of income. 

Loan terms are flexible, ranging from 36 to 60 months, and you can borrow from $1,250 to $25,000.

Refresh Financial reports on-time payments you make to Equifax and TransUnion, Canada’s two main credit bureaus.

The interest rate is 19.99%.

Option 2: Spring Financial

Spring Financial is an online lender that caters to those looking for credit products outside of traditional banks and credit unions, who often have strict eligibility requirements.

One of Spring Financial’s products is a credit building loan program called The Foundation, designed for those looking to establish or rebuild their credit standing.

The eligibility criteria is very lenient – the lender’s website indicates that they accept 100% of applicants.

This would make The Foundation one of the most accessible credit-building programs available in the country.

After signing up, you’ll make $55 bi-weekly payments, which Spring Financial reports to Equifax and TransUnion.

Half of each payment is allocated to a savings account, and you can access the funds at any time.

You have the option of increasing or decreasing your fixed payment amount.

The interest rate is 18.99%.

The program’s length is 12 months (with optional six-month extensions), after which you’ll gain access to Spring Financial’s higher-tier credit products.
 

Additional Ways to Build Your Credit

While a credit builder loan is one way to build your credit, there are other options to consider as well.

  • Secured credit card – a secured credit card differs from a standard credit card in that you must place a deposit before the lender permits you to use it. This deposit functions as the credit limit.
  • Personal loan – a personal loan is an installment loan where you receive a lump sum of money upfront. You pay off the loan by making fixed payments over a certain period, which includes interest charges.
  • Lending circle – a lending circle refers to a group of people who have gathered to lend money to one another, usually at a zero-percent interest rate. Lending circles organized as formal non-profit entities report timely payments to credit bureaus.
  • Co-signor – by having another person co-sign a loan with you, you can gain access to credit you’d normally be denied access to, enabling you to acquire credit experience.
  • Auto loan – an auto loan works much like a personal loan in that you receive funds upfront and agree to make fixed payments. Interest rates on auto loans are usually lower than those on personal loans since they’re backed by a vehicle.

Frequently Asked Questions

  • Do banks offer credit builder loans?
  • What type of loan is a credit builder loan?
  • A credit builder loan is an installment loan, like an auto or personal loan, where you contribute fixed monthly payments. You must also pay interest charges that accrue and any applicable fees. What distinguishes a credit builder loan from other installment loans is that you don’t receive the principal upfront. Instead, you’re responsible for funding it through your scheduled payments.


Mark is a freelance writer who specializes in writing content for firms in the financial services industry, including fintech. He has written for brands like Loans Canada, LowestRates, and The Motley Fool, covering topics related to investing, mortgages, credit cards, and many others.

He is passionate about educating people on how the financial markets work and providing tips to help them better manage their money. Mark holds a bachelor’s degree in finance from the Northern Alberta Institute of Technology and has more than a decade of experience as an accountant.

Outside of writing and finance, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.