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Mortgage

Condo, House or Townhouse: Which Is Best for You?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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Buying a home allows you to choose a residence that fits your lifestyle.

Should you buy a house in a suburb or a historic downtown? What about a condo within walking distance of a train station? Or maybe a townhouse in a new urban infill community?

Whether you’re a first-time homebuyer or are looking for a second home, choosing between a condo, house or townhouse requires you to consider location, maintenance and price. The good news is these housing styles have some overlap, so choosing one over the others may involve less sacrifice than you might expect.

What’s the difference between a condo and a townhouse?

Condominiums — called condos for short — are a kind of ownership, while townhouses and houses (stand-alone structures that most people would consider traditional, single-family homes) refer to physical structure styles.

Condos

Condos can come in a variety of shapes and sizes, though they are often similar in size and appearance to an apartment. At the same time, some condos can be quite expansive. They typically are private residences that are part of a building of multiple-unit communities, although some detached condominiums are available. Condos are occupied by an individual or a family and are often found in urban areas where land for construction is scarce.

Condos can also come in many configurations beyond apartment-style buildings, said Mark Swets, the former executive director of the Association of Condominium, Townhouse, and Homeowners Associations — “Condos have less restrictions. They can be converted from old office buildings or loft space.”

Regardless of their location or size, condo owners share ownership of common areas and facilities that are maintained by a board comprised of members elected from the condo community. The board collects dues from the community’s condo owners and uses the money to maintain and operate common areas and amenities, like community pools, gym facilities and landscaping.

Townhouses

Townhouses typically are vertical, single-family structures that have at least two floors and must be separated by at least one ground-to-roof wall with any other residence that may be attached to it.

Townhouses, which are individually owned, can be lined up in a row or arranged in a different configuration. Owners buy both the structure, including its interior and exterior, and the piece of land on which the townhouse is built, which may include a small yard.

In some cases, townhouses may be classified as condos. The way they’re categorized depends on what’s outlined in the declaration and bylaws for each association, Swets said.

Comparing condos, townhouses and houses

To help you decide which house and ownership type is best for you, we’ve highlighted comparisons as we look at condo versus townhouse, house versus condo and townhouse versus house.

Condo vs. townhouse

Benefits

Risks

Condos and townhouses both offer the opportunity to get to know neighbors and build a strong community and walkable amenities such as a pool or clubhouse, with generally less maintenance than a house. Condos may offer a variety of extra features, with new developments providing luxury conveniences such as rooftop bars, doormen and catering kitchens.Condo and homeowners association (HOA) fees can be expensive, and you’re trusting the HOA or condo association to provide satisfactory upkeep of the property. Condo fees tend to be higher than townhouse HOA fees — as much as several hundred dollars more — because condo associations typically provide more maintenance and amenities, and they can charge owners extra fees to pay for one-time facility expenses.

House vs. condo

Benefits

Risks

While condos offer a range of amenities and maintenance for the exterior of the property, owning a single-family home frees owners from the rules and restrictions of condo ownership. Buyers looking for privacy, a rural or suburban lifestyle or a larger property will have more options with a single-family house.Owning a single-family home means that the owner must pay for damage and upkeep to the interior and exterior that insurance doesn’t cover. Condo associations are liable for the exterior property and, if stated in the bylaws, “common elements” such as the roof and windows.

Townhouse vs. house

Benefits

Risks

Owners of both single-family houses and townhouses own their units, giving them freedom to improve and renovate as they see fit — within any guidelines for changes set by HOAs.Single-family homeowners assume responsibility for their property. Townhouse owners may not be liable for repairs, upkeep or incidents that occur outside their unit or the land on which it sits, depending on their HOA.

How to choose between condos and townhouses

Here are some factors to consider when deciding on what kind of residence to buy.

Maintenance

A single-family house gives you the freedom to fix up or renovate as you please, but you’re also responsible for repairs and maintenance. As a condo owner, the monthly fee you pay to a board or association may take care of maintenance such as mowing, exterior repairs and snow shoveling. Townhouse HOA fees may include maintenance of the community’s common areas, such as a shared backyard or playground, but that’s not always guaranteed.

“If I were to look at a condo, it would be because I didn’t want to worry about the maintenance outside,” said Lori Doerfler, immediate past president of the Arizona Association of Realtors. “If I wanted to have a piece of land but not a lot of yard, a townhome would be a good choice.”

Location and lifestyle

Condos, townhouses and stand-alone houses can offer a wide range of lifestyles and locations. Homebuyers should think through whether they’re interested in an urban, walkable lifestyle, a suburban neighborhood or something in between. Where you live also will determine your commute to work and proximity to family and friends.

Ownership restrictions

While condos can offer convenience and amenities, they also come with monthly dues and occasional assessment fees for special community projects, such as clubhouse repairs, and property rules, which can be strict. Single-family homes, especially those in neighborhoods without a homeowners association, have few or no restrictions.

Buyers should always check the community’s bylaws to understand the rules.

“I always want to get the covenants, conditions and restrictions to the buyer,” Doerfler said. “They describe the requirements and limitations of what you can do with your home as well as the grounds.”

Monthly fees

Any type of dwelling may come with a monthly fee to help pay for upkeep of the community’s amenities, which might include a gym, pool, clubhouse access and landscaping. Owners of a single-family house in a neighborhood with a homeowners association will pay monthly or annual HOA fees, and condo and townhouse owners will likely pay fees every month to their community board or association.

HOA fees typically can range from about $200 to $300 a month; other factors may contribute to how much the fee will be, like your location, unit size and available amenities. Monthly condo association fees can go as high as $700 or more, also depending on the amenities and services provided.

When factoring your monthly mortgage payment, be sure to add in the HOA or condo association fees to determine how much you’ll pay to live in the dwelling. Fees could significantly increase your cost, putting a seemingly affordable home out of reach.

Lending and price

Where you live will determine the price that you’ll pay for your home. Homes in desirable locations, such as a lively downtown area or a neighborhood with a good school district, can cost significantly more than homes with a long commute to a city.

Interest rates vary by lender and location, so it’s important to comparison shop with multiple mortgage lenders before making a decision.

Another consideration for each dwelling type is its resale value. It’s helpful to research resale information for similar homes in the community or neighborhood, and make a note of how long those properties were on the market before they were sold. You should also keep in mind that association fees could have an impact on whether a home is resold.

The bottom line

Your decision to buy a condo, house or townhouse should depend on:

  • What you can afford
  • How much maintenance you’re OK handling
  • Where you want to live
  • The type of community in which you want to live

For example, a family with kids may want a house with a big yard near a good school, while a single professional may be more interested in a downtown condo within walking distance to the office and nightlife.

As you consider which dwelling to buy, be sure to include the costs of condo or HOA fees in your housing expenses to determine whether your new home fits your lifestyle and your budget.

The information in this article is accurate as of the date of publishing. 

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Mortgage

APR vs Interest Rate: Understanding the Difference

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

It’s common for homebuyers to focus on interest rates while shopping for a mortgage, however, there’s another number that might even be more important.

While a low interest rate is appealing and directly impacts your monthly mortgage payment, it’s also important to look at each loan’s annual percentage rate, which provides a clearer picture of how much the loan will cost you when other fees are factored in.

The APR includes the interest rate as well as other fees and costs, and is expressed as a percentage. The interest rate only includes interest paid to the bank.

The difference between mortgage APRs and interest rates

An annual percentage rate (APR) is a broad measure of what it costs to borrow a loan. It includes the interest rate as well as other fees and costs.

The difference between an APR and an interest rate is that an APR gives borrowers a truer picture of how much the loan will cost them. Although an APR is expressed as rate just like interest, it is not related to your monthly payment — which is calculated using only the interest rate. Instead, an APR reflects the interest rate along with fees and other one-time costs a borrower will pay to get a mortgage.

“You can find a mortgage that has a 4% interest rate, but with a bunch of fees, that APR may be 4.6% or 4.7%,” said Todd Nelson, senior vice president of strategic partnership with online lender LightStream. “With all of those fees baked in, they are going to swing the interest rate.”

For example, one lender may charge no fees, so the loan’s APR and interest rate are essentially the same. The second lender may charge a 5% origination fee, which will increase the APR on that loan.

How APRs impact mortgages

Lenders calculate an APR by adding fees and costs to the mortgage interest rate and creating a new price for the loan. Let’s look at an example:

A lender approves a $100,000 mortgage at a 4.5% interest rate. The borrower decided to buy one discount point, which costs $1,000, to get the 4.5% rate (a discount point is a fee paid to the lender in exchange for a reduced interest rate). The loan also includes $900 in fees, which are being financed in the mortgage.

With the fees and costs mentioned above added to the loan, the adjusted starting mortgage balance becomes $101,900. The monthly payment (which consists of the principal plus interest) is then $516.31 with the 4.5% interest rate, compared with $506.69 if the balance had remained at $100,000.

To find the APR, the lender returns to the original loan amount of $100,000 and calculates the interest rate that would create a monthly payment of $516.31. In this example, that APR would be approximately 4.661%.

APRs will vary between lenders, as no two lenders are exactly alike. Some may offer competitive interest rates, but then tack on expensive fees and costs. Lenders with the same interest rate and APR probably aren’t charging any fees on that loan, and lenders that offer APR and interest rates that are close are likely charging a lower amount of fees and extra costs.

In short, APR gives you a way to compare two lenders offering the same interest rate so you make the smartest possible decision about your mortgage.

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What factors influence an APR?

APRs change as interest rates fluctuate, but they’re more impacted by lender costs and fees. Below are some of the common charges that affect APRs:

  • Discount points: Lenders allow buyers to purchase points in return for a lower interest rate. The cost of a point is equal to 1% of the mortgage amount and typically lowers the interest rate on the loan by an eighth of a percentage point. For example, a buyer approved for a $100,000 loan could buy three points, at $1,000 each, to lower the interest rate from 4.5 to 4.125.
  • Loan origination fees: Loan origination fees typically average about 1% of the loan amount. This cost can be especially significant for larger loans.
  • Loan processing: This fee, which some lenders will negotiate, pays for the cost of processing a mortgage application.
  • Underwriting: These fees cover an underwriter’s review of a loan application, including the borrower’s income, credit history, assets and liabilities and property appraisal, to determine whether the lender should approve the loan application and what terms should be applied to the loan.
  • Appraisal review: Some lenders pay an outside reviewer to make sure an appraisal meets underwriting standards and that the appraiser has submitted an accurate report of the home’s value.
  • Document drawing: Lenders often charge a fee for creating mortgage documents for a loan.

Closing costs that aren’t commonly in an APR calculation are notary fees, credit report costs, title insurance and escrow services, home appraisal, home inspection, attorney fees, document preparation and recording fees.

Because an APR includes a loan’s interest rate, rising interest rates will increase the APR for several products including mortgages, auto loans and other types of loans and credit.

How interest rates affect mortgages

A mortgage interest rate is the rate a lender uses to determine how much to charge a homebuyer for borrowing money. Mortgage rates can either be fixed or adjustable.

Fixed mortgage rates don’t change over the life of a loan. For example, if you take out a 30-year loan at a 4.25% interest rate, that rate will stay the same — regardless of changes in the economy and market index — until the loan is paid off.

On the other hand, adjustable-rate mortgages (ARMs) will fluctuate as market conditions change after an introductory period, often set at five or seven years. That means your interest rate could go up or down depending on the economy, which will in turn raise or lower your mortgage payments.

ARMs often start with a lower interest rate than a fixed-rate mortgage, but can dramatically increase after the intro period ends.

If you are considering an ARM, it’s important to talk to lenders first about what an adjustable rate could mean for your monthly mortgage payments. Be sure to ask the following questions:

  • How long is the introductory fixed-rate period?
  • How often does the interest rate adjust after the fixed-rate period ends?
  • How does this loan compare to fixed-rate mortgage options?
  • How much will the monthly payment and interest rate increase with each adjustment?
  • What is the cap on how high or low the interest rate can go?
  • Is the monthly payment still affordable if the interest rate reaches the maximum allowed under the loan contract?

What factors influence an interest rate?

Don’t be surprised if a lender’s mortgage rate is higher than what was advertised. Each loan’s interest rate is primarily determined by market conditions and by the borrower’s financial health. There are several factors that help determine your rate, including:

  • Your credit score: Borrowers with higher credit scores generally receive better interest rates.
  • Your down payment: Lenders may offer a lower rate to borrowers who can make a larger down payment, which often is an indicator that the borrower is financially secure and more likely to pay back the loan.
  • The loan term: The number of months you agree to pay back the loan can make a difference. Generally, a shorter-term loan will have a lower rate than a longer-term loan — but higher monthly payments.
  • The loan amount: Interest rates can be different for loan amounts that are unusually large or small.
  • The loan type: While many borrowers apply for conventional mortgages, the federal government offers loan programs through the FHA, USDA and VA that may have lower interest rates.
  • The location of the property: Interest rates are different in rural and urban areas, and can also vary by county.

Below, we use MagnifyMoney’s mortgage calculator to illustrate how interest rates can affect monthly mortgage payments.

Loan amount$250,000$250,000
Interest rate3.84%4.20%
Monthly payment
(Principal and interest)
$1,170.59$1,222.54
Interest paid after five years$8,651.39$9,517.96

As shown above, an interest rate increase of even less than a half-percent could bump your monthly payment up by nearly $52, and your interest paid over the first five years by more than $800.

Mortgage comparison-shopping tips

When you’re shopping for a mortgage, it’s wise to gather quotes from multiple lenders to ensure you find the best mortgage terms available. It’s also important to get those mortgage quotes on the same day and around the same time.

Online marketplaces such as LendingTree can provide real-time loan offers from multiple lenders, which makes it easier to compare mortgage APRs and interest rates.

If a loan’s APR matches its interest rate, you likely have a good deal. Otherwise, investigate the costs and fees behind a quoted APR to determine which mortgage offer is the best deal. The most effective way to do so is by comparing the Loan Estimate documents you receive from each lender after submitting a mortgage application.

Recent research underscores the significance of shopping around. Homebuyers could realize a potential interest savings of nearly $50,000 over the life of a 30-year, fixed-rate $300,000 loan by comparison shopping for the best APR.

Lastly, once you’ve found the best rate, ask your lender about your rate lock options.

What about APRs on ARMs?

The annual percentage rate on an adjustable-rate mortgage won’t apply for the life of the loan, since the interest rate and monthly payment will change as the economy fluctuates. The APR only applies during the loan’s initial fixed-rate period, and no one can predict how much the rate will increase in the years that follow.

For example, a 7/1 ARM has a fixed interest rate for the first seven years that is determined by the market conditions on the day the loan was closed. After seven years, the interest rate will adjust annually, based on the movement of the index the ARM is tied to, which is commonly the one-year LIBOR.

The new rate likely won’t be the same as it was when the loan was originated. Mortgage rates fluctuate daily, and no economic forecaster can accurately predict how the index will change in the future.

The bottom line

While lenders often push their low interest rates when they advertise loans, Nelson said it’s vital that consumers check APRs when shopping around, and pay attention to how loan advertisements are worded. Lenders may advertise “no hidden fees,” he said, but that might just mean there are other fees that simply aren’t hidden.

“Look for a lender that’s transparent about disclosing all of those fees,” Nelson said.

Ask for clarity about any cost estimates you don’t understand, and try to negotiate lender fees where possible.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Building Credit

Do Credit Builder Loans Actually Work?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you have no credit or bad credit, getting a loan may seem impossible.

When lenders are considering a loan application, their main concern is whether the applicant can pay the loan back. If there is no loan repayment history, or a record of late payments or loan defaults, a lender will likely determine the applicant is too risky.

A credit builder loan is one way you can start building a strong credit history that should eventually help qualify you for other loans.

What is a credit builder loan?

Building good credit, whether you are starting from scratch or repairing a bad credit history, requires patience. You’ll need to put in the work to show lenders you are a consistently reliable borrower who makes on-time debt payments.

A credit builder loan is a great way to begin establishing a good credit history. Here’s how it works:

A financial institution such as a credit union, which typically issues credit builder loans, deposits a small amount of money into a secured savings account for the applicant. The borrower then pays the money back in small monthly installments — with interest — over a set period of time. At the end of the loan’s term, which typically ranges from six to 24 months, the borrower receives the total amount of the credit builder loan in a lump sum, plus any interest earned, if the lender offers interest.

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APR

As low as 3.99%

Credit Req.

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Terms

24 to 60

months

Origination Fee

Varies

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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.


A Personal Loan can offer funds relatively quickly once you qualify you could have your funds within a few days to a week. A loan can be fixed for a term and rate or variable with fluctuating amount due and rate assessed, be sure to speak with your loan officer about the actual term and rate you may qualify for based on your credit history and ability to repay the loan. A personal loan can assist in paying off high-interest rate balances with one fixed term payment, so it is important that you try to obtain a fixed term and rate if your goal is to reduce your debt. Some lenders may require that you have an account with them already and for a prescribed period of time in order to qualify for better rates on their personal loan products. Lenders may charge an origination fee generally around 1% of the amount sought. Be sure to ask about all fees, costs and terms associated with each loan product. Loan amounts of $1,000 up to $50,000 are available through participating lenders; however, your state, credit history, credit score, personal financial situation, and lender underwriting criteria can impact the amount, fees, terms and rates offered. Ask your loan officer for details.

As of 17-May-19, LendingTree Personal Loan consumers were seeing match rates as low as 3.99% (3.99% APR) on a $10,000 loan amount for a term of three (3) years. Rates and APRs were based on a self-identified credit score of 700 or higher, zero down payment, origination fees of $0 to $100 (depending on loan amount and term selected).

How a credit builder helps boost credit

A credit builder loan helps borrowers build credit by providing an opportunity  to make small monthly payments. As the lender reports regular loan payments to credit reporting agencies, your credit history will show you can make regular, on-time loan payments over the life of a loan.

Most credit builder loans are small, ranging from $300 to $1,000, which means they also have small monthly payments. Interest rates vary by bank, so be sure you compare all your options to get the best rate.

To apply for a credit builder loan, you can visit a local lender’s branch or apply online. Because you won’t receive any money until the loan is paid in full, credit builder loans are typically easy to qualify for.

What to watch out for

Credit builder loans are not free, so be sure to ask about fees and interest rates. Some lenders may charge an application fee, and interest rates vary widely among lenders. While some offer rates in the single digits, other lenders’ rates may be significantly higher.

Where to get a credit builder loan

Here are examples of a few types of credit builder loans.

Credit unions

Many credit unions list details of their loans online and provide an online application.

1st Financial Federal Credit Union, for example, offers these terms:

  • Minimum Loan Amount: $300
  • Maximum Loan Amount: $1,000
  • Loan Term: 12 months
  • Interest Rate: 12%
  • Payment history reported to credit bureaus
  • 50% of interest refunded back with on-time payments

Banks

Some regional or local banks offer credit builder loans with the intention of helping clients build a good credit score as they work toward good financial health.

The Sunrise Banks Credit Builders Program, for example, places loan funds into a Certificate of Deposit (CD) for the borrower. The CD earns interest as the borrower repays the loan, which can be withdrawn when it’s paid in full. Consumers can borrow $500, $1,000 or $1,500, and they are assigned a repayment schedule of monthly principal and interest payments. Payments are reported to Experian, Transunion and Equifax.

Self Lender

Self Lender, based in Austin, Texas, is designed to help consumers increase their financial health. Working in partnership with multiple banks, Self Lender offers a credit-builder account that is essentially a CD-backed installment loan. In other words, you open a CD with the bank and they extend a line of credit to you for the same amount. When you make payments, they report it to the credit bureaus.

The money you put in the CD itself is what secures the loan.

Self Lender offers four loan amounts, each with 12 or 24 month terms. Borrowers can receive loans of $526 to $1,700. Fees vary from $9 to $15. See Self Lenders website for more details.

Pros of credit builder loans

  • A credit builder loan forces you to save money, as you are essentially making payments into a savings account.
  • Credit builder loans are secured by the money the bank has deposited for you, so they are typically easy to apply for.
  • When the loan is paid off, you will receive a payment in the amount of the loan. Some lenders also pay you dividends, or refund a portion of your interest.
  • You will develop good savings habits through a credit builder loan, which requires you to set aside money every month for a loan payment.
  • As you make payments on time every month, you’ll develop financial discipline that you apply to bigger loans.

Cons of credit building loans

  • Late or missed payments will be reported to credit reporting agencies, which could hurt your credit score.
  • They aren’t all free. For one, Self Lender charges a $15 non-refundable administrative fee.

Learn more:

Why your credit score matters

Credit scores are calculated by using your credit report, which is a record of your credit activity that includes the status of your credit accounts and your history of loan payments. Many financial institutions use credit scores to determine whether an applicant can get a mortgage, auto loan, credit card or other type of credit. Applicants with higher credit scores typically qualify for larger loans with lower interest rates and better terms.

Three federal credit bureaus, Equifax, Experian and Transunion, collect information from data providers and lenders, and use it to calculate your credit score.

Consumers typically have multiple credit scores. The two key scores are FICO and VantageScore.

FICO scores

FICO scores represent the likelihood that a borrower will pay back a loan on time. Scores range from 300 to 850, and over 90% of lending decisions in the U.S. are influenced by an applicant’s FICO score.

Five factors determine a consumer’s FICO score:

  • Payment history (35%)This is a record of your loan payment, and notes whether they were on time, late or missed.
  • Amounts owed (30%)Also known as utilization, this shows how much you use your credit limit. For example, if you have a credit card with a $15,000 limit and you have a debt of $3,000 on the card, your utilization is 20%. Ideally, your utilization should be less than 30% on all debts combined.
  • Length of credit history (15%)This measures the length of time you’ve had credit. If you opened your first credit card 20 years ago when you were a college student, for example, your credit history likely would be better than someone who took out their first loan a year ago. The longer you have credit, the longer you have had a chance to prove you are a responsible card user.
  • New credit (10%)New credit looks at how frequently you’ve inquired about your credit and opened new accounts. For example, when you open a new credit card, your credit score could be slightly lower for six months before going back up, because there will have been a “hard pull” by the lender on your credit report. Overall, however, you shouldn’t be hesitant to apply for new credit. In the long run, it may be better for your score, even if you experience a short-term hit.

VantageScores

VantageScore, which also measures your credit risk, is used by 20 of the 25 largest financial institutions. As is the case with FICO scores, higher Vantage scores lead to better loan opportunities. VantageScores range from 300 to 850, and are available for free online. VantageScore takes six factors into account.

Extremely influential

  • Payment history

Highly influential

  • Your age and type of credit (maintaining a mix of accounts over a long time is beneficial)
  • Percentage of your credit limit used (utilization)

Moderately influential

  • Your total debt balance

Less influential

  • Recent credit inquiries and credit behavior (don’t open a lot of new accounts at one time)
  • Available credit

How do I get my credit score?

There are numerous ways to get your FICO and VantageScore for free. Check out our guide on Ways to Get Your Free FICO Score. MagnifyMoney’s parent company, LendingTree, offers free access to your VantageScore, along with regular credit monitoring.

Other ways to build credit

Credit builder loans aren’t the only way to establish a good credit score. Here are some other options if you don’t want to take out a loan.

Secured credit cards

Like credit builder loans, secured credit cards are an easy way to build or rebuild credit history. The application process is the same, but secured credit cards require a deposit between $50 and $300 into a separate account. The bank then issues a line of credit that is typically equal to the deposit, allowing you to build a credit history without putting the lender at risk.

Many secured credit cards allow you to “graduate” and move to a traditional credit card after you’ve proven you can make payments consistently. Lenders will report your payments to credit reporting bureaus, and some offer autopay, online payments and alerts to help ensure you pay your monthly bill on time.

Keep in mind: Some secured credit cards have annual fees, along with APRs as high as 25%.

Unsecured personal loans

Unsecured personal loans can be easy to qualify for, and can help you build credit. These loans typically range from between $2,000 and $50,000, and some lenders will offer them to borrowers with lower credit scores.

The borrower will receive the money in a lump sum upfront, and can then use the money to repay the loan.

Using an unsecured personal loan to build credit, however, can be risky. Many unsecured personal loans come with origination fees, and interest rates can be high, which means the loan can be an expensive way to build credit.

LendingTree
APR

As low as 3.99%

Credit Req.

Minimum 500 FICO®

Terms

24 to 60

months

Origination Fee

Varies

SEE OFFERS Secured

on LendingTree’s secure website

LendingTree is our parent company

Advertiser Disclosure

LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.


A Personal Loan can offer funds relatively quickly once you qualify you could have your funds within a few days to a week. A loan can be fixed for a term and rate or variable with fluctuating amount due and rate assessed, be sure to speak with your loan officer about the actual term and rate you may qualify for based on your credit history and ability to repay the loan. A personal loan can assist in paying off high-interest rate balances with one fixed term payment, so it is important that you try to obtain a fixed term and rate if your goal is to reduce your debt. Some lenders may require that you have an account with them already and for a prescribed period of time in order to qualify for better rates on their personal loan products. Lenders may charge an origination fee generally around 1% of the amount sought. Be sure to ask about all fees, costs and terms associated with each loan product. Loan amounts of $1,000 up to $50,000 are available through participating lenders; however, your state, credit history, credit score, personal financial situation, and lender underwriting criteria can impact the amount, fees, terms and rates offered. Ask your loan officer for details.

As of 17-May-19, LendingTree Personal Loan consumers were seeing match rates as low as 3.99% (3.99% APR) on a $10,000 loan amount for a term of three (3) years. Rates and APRs were based on a self-identified credit score of 700 or higher, zero down payment, origination fees of $0 to $100 (depending on loan amount and term selected).

The bottom line

While credit building loans can be a key step in establishing a strong credit history, it’s imperative you make all your payments in full and on time. When you are committed to building a strong financial future, successfully paying off a credit builder loan can be a significant factor in someday getting favorable terms on a mortgage and other loans.

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Marty Minchin
Marty Minchin |

Marty Minchin is a writer at MagnifyMoney. You can email Marty here

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