A credit-builder loan is a financial product used to — as the name implies — help someone establish or build credit.

Unlike traditional personal loans, credit-builder loans aren’t necessarily designed for folks who need to borrow money for a big or unexpected expense. Rather, they make it easier for borrowers to repair their existing credit while also building savings.

Here’s how credit-builder loans work, how to get one and some alternatives to consider if you’re trying to build credit.

If you’re considering a traditional personal loan, Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.

With a standard personal loan, a lender gives you money up front, which you repay in a series of installments until the debt is satisfied.

With a credit-builder loan, however, the lender doesn’t disburse upfront funds. Instead, the lender will hold the money in a designated account (where it may or may not accrue interest) until you repay the loan amount.

A credit-builder loan operates in reverse order compared to a traditional loan:

These reported payments will help build up the payment history portion of your credit report, as well as boost your average age of accounts and your credit mix, which can all improve your credit score over time.

Once you’ve repaid the loan, the lender will give you the money that was held in your credit-builder account. You can then use that money as an emergency savings account, to pay off credit cards, or to cover large or unexpected expenses.

Credible doesn’t offer credit-builder loans. But you can visit Credible to compare personal loan rates from various lenders, without affecting your credit score.

If you’re interested in applying for a credit-builder loan, follow these four steps:

1. Compare credit-builder loans from at least a few different lenders. Look at the loan amounts they offer, interest rates and repayment terms. This will allow you to find the most cost-effective loan for your needs.
2. Qualifying for a credit-builder loan is usually easier than taking out a standard personal loan, as the lender takes on less risk by holding onto the borrowed amount. But you may still need to meet certain requirements related to your age, income, citizenship and location. If the loan is offered by a credit union, you may also need to become a member to take out a loan.
3. Once you’ve found a competitive credit-builder loan product that meets your needs, it’s time to apply. You may need to provide additional documentation to verify your identity and income.
4. Once your loan is finalized, you’ll start making payments to your lender as agreed. At the end of the loan repayment term, you’ll receive the funds.

The cost of a credit-builder loan comes down to interest and time.

These loans — like personal, auto, and student loans — come with an interest rate. This is the lender’s fee for lending this money to you, expressed as a percentage. Credit-builder loans are less risky to lenders than immediate-disbursement loans, so they often come with lower interest rates. This can save you money over the course of the loan term.

For some borrowers, though, time may be the bigger cost. Since credit-builder loans aren’t disbursed until the debt is satisfied, you’ll be paying down the balance of a loan you haven’t actually received. If you need that money for consolidating other debt, paying off a big expense, or building emergency savings, you’ll have to wait up to 24 months to access that money.

Like all credit products, credit-builder loans have both benefits and drawbacks. Whether you’re trying to build up a non-existent credit history or recover from a 500 credit score, these loans can help — but they aren’t necessarily the right fit for everyone.

If you’re looking to build credit but aren’t sure whether a credit-builder loan will meet your needs, here are some alternatives to consider:

If you’re interested in a secured personal loan, or applying for a loan with a cosigner, Credible lets you quickly and easily compare personal loan rates to find one that suits your needs.