Living with credit

Small loans help subprime borrowers boost credit scores

Kelly Dilworth

If you’re struggling to build or rebuild your credit, you may want to look into obtaining a small-dollar loan from a nonprofit lender.

A new analysis from Experian showed that when borrowers teamed up with a nonprofit lender affiliated with the Credit Builders Alliance — which helps nonprofits report loan data to the credit bureaus — they improved their credit scores considerably.

Over a two-year period, 58 percent of borrowers saw their VantageScores tick up. Meanwhile, over 20 percent of borrowers added so many points to their credit scores that they moved up to a better credit risk tier.

Small loans help subprime borrowers boost credit scores

Borrowers previously classified as subprime borrowers, for example, were reclassified as “nonprime” borrowers (considered slightly better in the eyes of a lender) by the end of the two years. Those once considered “nonprime” bumped up to become “prime” borrowers, allowing them to qualify for lower interest loans and more-enticing offers.

In fact, the total number of “prime” borrowers served by nonprofits affiliated with the Credit Builders Alliance jumped 5 percent in two years, according to Experian.

The borrowers increased their credit scores over time by getting a loan tailor-made for credit-building: small enough that they could afford to repay it and never miss a payment.

“The first ever national study of CBA’s membership has confirmed exactly what our experience has shown to be true,” said the Credit Builders Alliance executive director Dara Duguay in a news release about the study. “When people pay regularly on their credit obligations and these payments are reported to a credit bureau, those individuals will benefit through building stronger credit reports and scores.”

Why a nonprofit?
If it’s a good one, a nonprofit lender should offer you substantially better terms on a small dollar loan than other lenders that cater to people with poor or nonexistent credit, such as subprime or payday lenders.

According to the Credit Builders Alliance, a number of nonprofit lenders have popped up in recent years in order to help combat the proliferation of high cost loans that trap people into debt.

Many of the nonprofit lenders combine credit-counseling services with relatively low cost loans for low-income borrowers who have either struggled with credit in the past or have never used it.

For example, the Virginia-based nonprofit, People, Inc., charges borrowers an APR as low as 8.25 percent for a 36-month loan that’s designed to “provide assistance with many household expenses, car purchases and bill consolidation.”

Similarly, the Rhode Island-based Capital Good Fund charges individuals a much higher APR — 20 percent — for a two-year personal loan that you can use to “cover the costs of immigration, pay the security deposit for an apartment, repair an automobile, purchase a computer, etc.” But it also offers a coaching service that helps borrowers live a financially healthier lifestyle, and it doesn’t have a minimum credit score cutoff.

So if you live in Rhode Island and your credit is in especially poor shape, you’ll probably be able to get a better deal from the Capital Good Fund than any other subprime borrower. (The national average APR on credit cards for consumers with bad credit, for example, is 22.73 percent. But that calculation is based on the minimum APRs those types of credit cards charge.) The nonprofit also offers a small-dollar emergency loan service that charges a 30 percent APR, considerably lower than the three-figure APRs many payday lenders charge.

How to find a good one
There isn’t a comprehensive directory of nonprofit lenders. But the Credit Builders Alliance lists a number of lenders that are focused on credit building in a 2013 report on nonprofit lenders. You can also find lenders in your area that are affiliated with the Credit Builders Alliance by typing your ZIP code into the group’s “Find a member” search tool.

In addition, you may want to check with your local credit union to see if they offer a low-cost credit-building program for borrowers with poor or nonexistent credit. You can also try searching on Google for nonprofit lenders in your area.

Ask about any fees that may be associated with the program and watch out for loans that ask for a hefty upfront fee in addition to annual and monthly servicing fees.

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