Published: 27 July 2023
Updated: 8 February 2024
Author: Noah Gomez
The main components of credit builder loans (CBLs) are integral parts of the loan contract and include principal amount, interest rate, duration, distribution timing, and collateral. These components are common to all loans, but CBL lenders use them to create unique advantages.
Principal amount is the dollar value borrowed, and interest rate is the percent cost the borrower pays on principal. Duration is the number of periods in months over which the borrower makes fixed installment payments.
Distribution timing is the period in which the principal is disbursed to the borrower. Importantly, collateral consists of cash held in savings and not physical assets as with other secured loans.
CBL loan components are not the same as types. Each type modifies components to distinguish themselves and cater to the needs of varying consumer credit profiles. Payment-secured CBLs, for example, hold payments as collateral until principal disbursement, whereas unsecured CBLs do not.
Contrary to traditional loans, credit builder loan disbursement timing usually occurs in the final period. Each payment doubles as collateral because it sits in a savings account or certificate of deposit until distribution. This structure is essential to CBLs'.
Each component must be catered to the credit profile of the borrower. A consumer with charge-offs and collections on a $500 loan would benefit from a $1,000 CBL. In contrast, a borrower with no history can do just as well with $500 because he/she doesn't need to counterbalance derogatory marks. This is called the "equal or exceed" principal of credit building.
A consumer with a <650 FICO score who needs to finance an emergency would benefit from an unsecured credit builder, which has no savings collateral and provides cash upfront. A consumer with high income but poor payment history would do better with a payment-secured CBL over a long duration.
Collateral is the most important component because CBLs use it to provide low rates and flexible eligibility criteria, as well as to build savings. Collateral is also the differentiating factor between the three types of CBLs.
In most cases these five components are sufficient to make an informed decision, but 10 additional criteria provide deeper context. Consumers who understand these components in theory can make better choices in practice.
The loan duration component tells borrowers how long they make payments, but it doesn't explain what they should expect over time. Every other component evolves as time passes, so it's useful to visualize the credit-builder loan structure with a timeline.
The start of a credit builder loan is the moment of signature. Fully-secured and unsecured loans disburse loan principal at that time. You will also need to deposit the full amount up front on fully-secured loans. After that, the steps include:
Studious borrowers benefit from understanding all the terms of their loan. The following ten impact the total cost, cash flow, and future obligations.
Let's look at the Credit Union of Southern California's credit builder loan as an example. We'll use averages for illustration purposes. Borrowers can replace these figures with the terms of their desired offer.
You can find these components for almost every credit builder loan in the market (>200)¹ via our programs and via content on the website.
Noah Gomez (founder of Thick Credit) is a transatlantic professional and entrepreneur with 3+ years experience in consumer finance education. He also has 5+ years of experience in corporate finance, including debt financing, M&A, listing preparation, US GAAP and IFRS.
Thick Credit is not a credit repair organization, a credit conseling agency, or a debtor education providor. It does not act on your behalf to communicate with credit reporting agencies or provide pre-bankruptcy credit counseling and pre-discharge debtor education for bankruptcy.
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