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I'm looking to create a Credit Builder loan and am curious how much positive impact it will have on their FICO Score?
PRODUCT: A Bullet Loan where a payment of the entire principal and interest of the loan is due at the end of the loan term (1 year)
LOAN SIZE: $2,000 - $3,000 (much larger than other Credit Builder loans around $300 to $1,000)
APR: 20% Max
ADDITIONAL FEES: $0
SECURITY: None
CREDIT REPORT FILING: Monthly to relay that the current terms of the agreement are met
As my loans are larger than normal but only have a single payment coming at the end, is this better or worse than existing products? Any guesses on the FICO impact for those who are credit invisible or for someone recovering from bad credit?
This is no bueno
@Anonymous wrote:This is no bueno
why?
@Anonymous wrote:I'm looking to create a Credit Builder loan and am curious how much positive impact it will have on their FICO Score?
So you plan to enter the retail lending market? Ok... I assume you know it's a bit more involved than just having some capital and a vague idea, right?
@Anonymous wrote:
PRODUCT: A Bullet Loan where a payment of the entire principal and interest of the loan is due at the end of the loan term (1 year)
LOAN SIZE: $2,000 - $3,000 (much larger than other Credit Builder loans around $300 to $1,000)
APR: 20% Max
ADDITIONAL FEES: $0
SECURITY: None
CREDIT REPORT FILING: Monthly to relay that the current terms of the agreement are met
This is... not a good option for, well, anyone. Especially someone trying to build or rebuild credit.
High interest rate, unnecessarily high principal, balloon payment (making the actual interest payment much more than a regular 12-month amortized loan), and the worst part is reporting 100% loan utilization for the entire time the loan is open!
That's frankly, terrible.
@Anonymous wrote:
As my loans are larger than normal but only have a single payment coming at the end, is this better or worse than existing products? Any guesses on the FICO impact for those who are credit invisible or for someone recovering from bad credit?
Worse. In pretty much all ways.
The balloon payment ("single payment coming at the end") results in a client with a $3,000 loan at 20% APR, paying a lump sum of $3,600 at the end of the term - vs a standard amortized 20% APR at $277.90/month ($3,335 total for the year).
The balloon payment also means that you open the loan at $3,000 balance of $3,000 original, and continue to report that full 100% utilization for the full 12 months of the loan, until finally reporting it paid/closed. This is terrible for scoring, since much of the benefit from a loan like this comes once the loan is reporting more than 90% paid-off (less than $270 remaining balance, in this example).
The unnecessarily high loan amounts ($2,000-$3,000) are not a benefit to a "credit invisible" client - the dollar amount of the loan doesn't matter - the existence of a positive account, and how close it is to being paid off (while remaining open) is what matters. Otherwise, the high loan amount (plus the balloon payment) just cranks up the interest the client pays, without any actual benefit. (There's a borderline case where loan amount could have a small effect, but it only applies if the client already has existing open loans, with very little paid down on them.)
If you really wanted to design a new "loan" product specifically to boost low or non-existant scores (not sure why, since that market seems fairly well-supplied), you'd want to do something like this:
(Even with all that, you'd be competing with lenders that offer SSLs at much lower effective rates... doesn't seem worth it to me.)