The Startup That's Offfering a 'No Hassle' Loan to Build Credit

It’s the big Catch-22 of our current credit scoring system — to get credit, you need credit — and it’s kept millions of people from establishing a credit score. Without that credit score, prospective borrowers may have a hard time buying a home, a car or getting a credit card. And, if they do get one, they’ll likely pay more for it in fees and interest.

But one Austin-based startup says it can make it much easier for consumers to establish their creditworthiness.

Self-Lender, which launched in late February, is currently giving out credit-builder loans to borrowers with thin or non-existent credit histories. The payments on these loans are reported to all three major credit reporting agencies, Equifax, Experian and TransUnion — meaning, by the time the loan has been repaid, borrowers will likely have established a credit score.

What’s a Credit Builder Loan?

Credit-builder loans are small-dollar installment loans with terms ranging from six to 18 months. They’re typically offered by small banks or credit unions. But, unlike a traditional line of credit, the money being borrowed gets put into a savings account. The borrower then make a series of monthly payments and gets access to the money once the loan is paid in full. Because the financial institution isn’t taking on a lot of risk extending loans (they’re essentially sitting in their vault), they tend to tout lower annual percentage rates and fee structures than traditional credit lines. They may also accrue a small amount of interest, or annual percentage yield, for the borrower.

Self-Lender follows this model pretty exactly. Applicants receive a $1,100 loan with a 12.52% APR that they pay back by making $98 monthly payments over a 12-month term. The $1,100 is held in an FDIC-insured account during that time. (Self-Lender is backed by Austin Capital Bank, which actually collects the interest — about $75 in total — on each loan; The bank, in turn, pays servicing fees to Self-Lender.)

Borrowers earn a (very, very, very) small amount of interest back when the loan is paid off — a 0.1% APY, which adds up to $1.10. But the real value-add, the startup said, is the opportunity to build credit with very little hassle.

“It’s kind of hard to get credit without someone helping you,” James Garvey, CEO and co-founder of Self-Lender, said. With credit-builder loans, traditionally, you need to join the credit union or have an existing relationship with a bank to get one. “What we want to do is take the credit-builder loan, make it easy, make it online and make it no hassles,” he said.

To apply, applicants must enter their name, address, phone number, date of birth, Social Security number or individual taxpayer ID number on the website. Self-Lender will use this information to verify their identity; It also prompts borrowers to answer a few authentication questions based off of data pulled from specialty credit reporting agency Chex Systems, Inc.

“We ask for income, but we don’t verify,” Garvey said. “There’s no restrictions in terms of traditional credit score or credit history.” You could, however, get rejected for the loan if had any forced bank account closures in the past 180 days.

What Does It Cost?

Keep in mind, you’ll only build good credit with Self-Lender’s loan if you make your loan payments on time. If you don’t, missed payments will get reported to the credit bureaus and you could wind up with a bad credit score.

Self-Lender has put some policies in place that can help keep credit newbies from going completely off the rails. You’re given access to credit monitoring, so you can see where your score stands over time, and you can bail on the loan after the sixth months, if you no longer wish to pay. At that time, you’ll get the money you paid off plus any accrued interest back.

Late payment fees of $4.90 are assessed 15 days after you miss a due date. But you’re only charged one late payment per month and the loan self-terminates after 80 days. So, in a worst-case scenario, you will have paid three late fees for a total of $14.70 on a defaulted loan. If that happens, you will receive the loan deposit amount, plus accrued interest, minus any amounts due. But the default will be reported to the credit bureaus.

Self-Lender said it is able to offer the loans at affordable rates, thanks to the efficiency of its underwriting system and plans to offer loans in volume. As of March 6, the startup had issued 82 credit-builder loans with a value of $90,200 in loans and $90,200 in CD accounts.

Building Credit

Remember, credit-builder loans aren’t the only way you can build or repair your credit. Secured credit cards, for instance, also are designed for people with thin-to-no (or even bad) credit. (You can go here to learn about the best secured credit cards in America.) And student credit cards are an option for young borrowers.

You could potentially build credit by asking a parent or guardian to co-sign a loan. They could alternately consider adding you as an authorized user on an existing credit card account. (Just be sure that their issuer reports authorized users to the credit bureaus, because not all do.)

Be sure to read the terms and conditions of any loan you are considering carefully. And comparison-shop to find a product that is right for you. When it comes to credit-builder loans, for instance, you’ll want to look at the APRs and APYs you are being offered. You should also check if any upfront fees or deposits are required.

Once you have a line of credit, you can build a good credit score by making all payments on time, keeping your debt levels low and adding a mix of new accounts organically over time. People with bad credit may be able to improve their score by disputing errors on their credit report, identifying their credit score killers and creating a game plan to address them. You can monitor your progress by viewing your two free credit scores each month on Credit.com.