What is a credit builder loan?

A credit builder loan is pretty much exactly what it sounds like; a loan that will help you build up your credit score. They are meant for those who have bad credit or no credit history at all. The goal of a credit builder loan is to increase your credit score to a point where you can easily apply for credit cards and loans at a better rate.

How do credit building loans work?

Credit building loans work almost in the complete opposite way of a traditional loan. With a traditional loan, you will receive a lump sum of money that you will pay back over time.

With a credit building loan, the whole point is to pay rather than receive to build your credit score. So, once you have been approved for a credit builder loan, the lender will open a savings account and you will start making monthly payments. The money will be deposited into that savings account until the length of the loan (usually around 6-24 months) is up. During this period, the lender reports the payments to the credit bureau which builds your credit. You then receive the money (and a higher credit score) at the end of the process.

Keep in mind that unlike with traditional loans, you don’t want to pay off more than you need to per installment. This defeats the purpose. You want to have multiple months of positive payment history. On the same note, you need to make sure you avoid late payments as that can have the opposite effect and further damage your credit score.

Best credit building loans in Canada

Lender Lender Type Loan Amounts Interest Rate Admin/Legal Fees?
Refresh Financial Direct $1,250-$10,000 19.99% No
Loans Canada Platform Varies Varies Varies
LoanConnect Platform Varies Varies Varies

Refresh Financial

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Refresh Financial has been around since 2013 and has helped over 100,000 Canadians rebuild their credit. The Refresh Financial Credit Builder Loan offers loan amounts of 5 different values: $1,250, $2,500, $5,000, and $10,000. The interest rate is 19.99% which is higher than many personal loans but the same as a typical credit card. They do not charge an admin fee.

The Credit Builder Loan from Refresh Financial is not available to residents of Quebec.

Loans Canada

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Loans Canada works a little differently than other loan providers. They are a lender network, rather than a lender themselves. This means you can use their platform to search for and compare different loans. Then, depending on your needs and financial situation, they will show you the best offers from their partner lenders and you can move ahead from there. While using Loans Canada may require a little more time and effort since they are essentially the middle man, they do the research for you making it easy to compare rates. Loans Canada is free to use.


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Like Loans Canada, LoanConnect is a lender platform that allows those in search of a credit building loan to compare options and find the best lender for their needs. Again, going this route is an easy way to do some research on the different options available to you as they will show you the various interest rates, terms, and loan amounts offered by applicable lenders.

Where to find a credit builder loan

Credit builder loans aren’t as common as other types of loans, but you can still find them from our top recommendations above, or a couple of other different places.

Online lenders

Online lenders are our preferred resource to find a credit builder loan. This is because they make it so easy to do. You don’t have to worry about scheduling time or going to an office, it can be done from the comfort of your home. This also makes it easier to compare options.

Credit union

Most credit unions will offer credit builder loans as well. Granted, you may have to go through a few loopholes to get in with the credit union since many require you meet certain mandates including living or working in the area or, in some cases, you need to work in a certain profession. Additionally, you will have to buy a share to establish membership. That being said, credit unions are traditionally for about the people than for themselves and often offer great rates.

Local banks

Not all local banks offer credit builder loans, so you’ll have to contact a few local branches near you to inquire if you choose this route.

How to get a credit building loan

Getting a credit builder loan requires a similar process to any other type of loan.

First, do your research and figure out where to get the credit builder loan from. As mentioned, you have options as to where you get your loan from. You’ll want to take some time to compare your options in terms of loan amounts, interest rates, and fees.

Next, apply for your credit building loan. The process is similar to typical loan or even credit card applications. You will need to share your personal information as well as your employment and housing status. In addition, you may be asked for proof of income and employment.

Finally, get approved and start building your credit! Once approved, the lender will open a savings account and you can start making your monthly payments and work towards building your credit score.

What are the requirements?

So, how do you get a credit builder loan? Don’t worry, unlike most other loans your current credit score does not come into play here. After all, the general idea is that you are getting a credit builder loan because you need to better your credit score. To apply for a credit builder loan, all you need to do is be able to prove that you have enough income coming in that you can afford to make the required loan payments.

What can they be used for?

A credit building loan isn’t a traditional loan. So, stated above, you don’t actually get the money until the end and it’s essentially your own money that you are getting back. So you can use the funds however you please, since they have already served their purpose. There are no additional funds coming through. In fact, credit loans cost you money as the lenders charge fees and interest.

What to consider when thinking about a credit building loan

In theory, a credit builder loan is an easy and effective way to help increase your credit score. That being said, there are a few things you should consider first.

To start with, credit builder loans are not free. You need to pay interest (often higher rates) as well as fees.

Secondly, the success of your credit builder loan depends entirely on you. It’s up to you to ensure you have enough money to make the payments. It’s also up to you to ensure you make those payments on time. Failure to do so will backfire on your credit building goals.

Finally, keep in mind that the money you pay towards your credit building loan is inaccessible until your loan period is up. You need to ensure that you can do without that money for the duration of your loan term.

Pros and cons of credit builder loans

Credit builder loans can be a big help, but they do have some downsides as well. Here are some of the main pros and cons.


  • Easy to apply for
  • The end result, a higher credit score, means you will be much more likely to be approved for credit cards, loans, a mortgage, and receive better interest rates.
  • Can help you develop more disciplined habits when it comes to making regular payments and saving money


  • They are not free. You will have to pay interest and likely set up fees
  • Late or missed payments will be reported to the credit bureau as well and have a negative impact on your credit score

Who should (and shouldn’t) get a credit building loan

As mentioned above, credit builder loans are designed for those who have poor or no credit and are looking for a way to build it up. So, if you already have good credit then there is no need for a credit building loan. You are doing things as you should, just continue on that path.

That being said, not everyone who has a poor or no credit should get a credit building loan. While it can be a successful way to build credit, it can also backfire and lower your credit score even more if you aren’t able to follow through with your payments in time.

If you decide to get a credit building loan, you need to be absolutely sure that you can make the required payments in full and on time.

The final word

There are other ways of building your credit score, like making payments on your credit cards on time, or increasing your credit lines. Aside from a credit building loan, you might also want to consider a secured credit card to improve your credit score. However, if those methods don’t work for you then it may be worth your while to apply for a credit builder loan. Just make sure that you can in fact make the required payments on time and in full. If you are unable to make that commitment, then avoid getting a credit builder loan because the inability to stay on top of your installments will only make things worse.

Hannah Logan Freelance Contributor

Hannah Logan is a Canadian freelancer writer and blogger who specializes in personal finance and travel. You can follow her adventures on her travel blog EatSleepBreatheTravel.com or find her on Instagram @hannahlogan21.


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