Have you ever considered taking out a loan for the sole purpose of rebuilding your credit score?
While some smaller loan options can have a positive impact on your credit score, here at LoanConnect we usually recommend a Credit Rebuilding Program instead. Unlike a standard loan, these programs are specifically designed to improve your score. And unfortunately, the cost of borrowing money is often too expensive to manage, creating financial difficulty elsewhere. By choosing a Credit Rebuilding Program you are usually paying lower interest rates, creating more manageable payments. More manageable payments means less likelihood of financial difficulty such as defaulting on a loan.
However, there are many misconceptions about what a Credit Rebuilding Program (also known as a Reverse Savings Loan) really is. Many people don’t know what it can do, why it works, or why it’s almost always better than applying for a loan to rebuild their score.
How do Credit Rebuilding Programs Work?
A Credit Rebuilding Program works by creating a “loan” and placing it in a secure savings account (a GIC) in your name. Unlike a traditional loan, you are not given any money upfront to repay. Instead, you make payments towards that “loan” that are essentially paying into your own savings account and released to you at the end of the program. Every scheduled payment you make is reported to the Credit Bureaus as successful loan repayments, helping to raise your credit score.
These payments are usually set up through automatic banking withdrawals and your “loan” is held as collateral until you complete the program. At the completion of the program you get the “loan” amount returned to you!
The Result
Successfully completing the program typically results in a credit score increase of about 60 – 75 points. However, these programs are not “set-it-and-forget-it” improvement tactics. You must remain aware of the following things while completing the program:
- Payments to all creditors must remain consistent, on-time and in full
- You must avoid frequent credit checks from other vendors
- The program must be completed in full to receive the full benefit of the score increase
- There are many other factors that ultimately determine your credit score. It’s best to understand what those are so you are not working against yourself while in one of these programs. You can read more in our other blog below.
Why a Credit Rebuilding Loan?
There are 5 big reasons a Credit Rebuilding Loan can work better than a loan from a private lender.
1. The payment terms are shorter, so you are done faster.
Taking a standard loan with a credit score below 600 will mean drastically higher interest rates and longer repayment terms. With a private lender, you could be looking at interest rates of 30-40% or higher, with long repayment terms. For example, a $2,000 loan at 40% interest could mean roughly $80 a month for potentially 4-5 YEARS.
A credit rebuilding loan on the other hand, usually takes 1-2 years to “repay”. This means you are done paying sooner, and you can see the results of those payments almost right away. Start rebuilding your score now, so better loans are available to you sooner!
2. The interest rates are far lower, saving you money.
In a Credit Rebuilding Program there is less risk from the lender’s perspective so rates are often closer to 10-15%, or even as low as 8.99%. This is possible because no money is provided upfront, and you are essentially paying yourself.
An interest rate must still be included in the program in order for it to be officially listed as a loan. This is required so that the company administering the program is able to report it to the Credit Bureaus. Without this reporting, the program is not helpful in improving your credit score.
Since interest rates add to the amount you need to repay, it simply makes sense to use a program with an interest rate that is less than half of what a lender would offer.
Let’s compare what a Credit Rebuilding Program will cost you, compared to a standard loan.
| Credit Rebuilding Program (15%) | Standard Loan (30%) | Standard Loan (40%) | |
| Initial Amount | You save $1,500 of your own money to be returned to you. | You receive a $1,500 loan | You receive a $1,500 loan to |
| What You Pay | $2,100 | $2,911.78 | $3,487.24 |
| Term Length | 1-2 Years | 5 Years | 5 Years |
| Impact to Your Credit Score | Improvement of roughly 60 – 75 points | Unknown | Unknown |
3. The payments are guaranteed to be reported to both Credit Bureaus.
As mentioned earlier, a proper Credit Rebuilding Program reports your payments to both Credit Bureaus (Equifax and TransUnion). If the payments are not reported, your loan will not affect your credit score positively at all. Having your payments reported also allows peace of mind that your hard-earned dollars are working for you! Completing a Credit Rebuilding Program can usually improve your credit score by roughly 65 – 70 points.
When compared to a standard loan to rebuild your credit, a default in repaying the loan will be reported to the Credit Bureaus. This will certainly cause a negative impact on your credit score and ultimately achieve your opposite goal.
4. You end up spending less!
As seen in the comparison chart above, the Credit Rebuilding Program costs far less than a loan from a private lender. The Credit Rebuilding Program still costs you extra, $600 to be exact, but it’s to your benefit. That $600 accounts for $300 in interest, and $300 in fees to report payments to the Credit Bureaus. And as mentioned, at the end of the program you get your lump sum “loan” returned to you.
Alternatively, loans through a private lender usually cost you significantly more without any benefit. Those interest costs equate to lost money in turn for borrowing your loan in the first place. And at the end of repayment, you have less money, not more.
Although a loan may seem beneficial because you get the money upfront, it costs you more in the long run. Depending on your interest rates, that interest could add to nearly double, or more, of the original loan value. With a Credit Rebuilding Program you don’t see the money upfront, but it doesn’t cost you nearly as much. And your monthly payments are working for you, to ultimately leave you in a better position than where you started.
5. It’s better than simply saving on your own!
Setting up your own monthly transfer to a savings account will still leave you with $1,500 after the same time period – but it won’t improve your credit. Utilizing the Credit Rebuilding Program ensures your hard work to save is reported to the Credit Bureaus; something banks and credit unions don’t do. Allow your hard work to work for you!
Added Benefits of Credit Rebuilding Programs
Credit Rebuilding Programs are also beneficial for those looking to buy a home in the future. First, by building your credit score you can begin to qualify for lower mortgage rates, decreasing your monthly payments. Mortgage lenders will want to see one loan of $2,000 or more successfully completed as part of their requirements; a $2,000 Credit Rebuilding Program loan is also recognized. Second, you could use the savings you get back towards additional fees associated with the purchase of a home.
Working with one of our partners for your Credit Rebuilding Program also means frequent updates with tips, tricks, and ideas to continue boosting your credit score. Our partners genuinely care about helping people reach their financial goals.
Final Thoughts
A Credit Rebuilding Program is the most cost effective way to rebuild your credit score. It takes about half the time (or less) to “pay off”, and at the end of the program you receive a lump sum payment of your own money to use however you want! Whatever the reason for rebuilding your credit, a Credit Rebuilding Program is a simple and effective way to reach your goals.
To apply for one of these programs you can use the Apply Now button below and select “Rebuild Your Credit” on your application, or reach out to us at team@loanconnect.ca and we’d be happy to help connect you.
