Based on data of over 200 lenders, the average cost of credit builder loans (CBLs) is $264 in interest and origination fees, with a range of $1 to $2,500 depending on principal, interest, and avoidable fees such as late payment charges¹.

CBL costs include five parts known as interest, origination fees, late payment penalties, payout fees, and early closure fees. Interest is present on all CBLs, but the other four fees vary by lender.

Interest and origination fees are unavoidable costs. Unavoidable costs are those that borrowers cannot change with responsible use. They're collectively expressed as Annual Percentage Rate (APR). APR is a legal cost disclosure established by the Truth in Lending Act consumers can use to compare options across lenders.

APR does not include avoidable costs, which refers to fees that borrowers can bypass with responsible use. Late payment penalties, payout fees, and early closure fees are avoidable costs. Though absent in APR, avoidable costs are disclosed separately in the loan agreement as required by law.

Moreover, CBL costs do not include membership fees that some lenders charge as a prerequisite to borrowing. Because membership is a separate service from CBLs, it is not included in APR and not disclosed in the loan agreement. Memberships effectively bypass the Truth in Lending Act (TILA) but still impact consumers.

Transparent low costs are a hallmark of high-quality CBLs and help borrowers understand how the loan works. Many CBL lenders forego avoidable costs entirely in favor of straightforward interest structures.

Good credit builder plans isolate these offers so borrowers with limited time can build credit without fear of hidden fees.

Summary

Example

Imagine you live in Kansas and apply for First Federal Bank of Kansas City's credit builder loan for $1,250 at 24% interest over 18 months. There is also an flat origination fee of $12.

You pay $83.24/month for a 18 months for a total of $1,498. The bank then gives you back the loan principal of $1,250, minus the $12 origination fee, so a net amount of $1,238.

Altogether, the total cost is $260.24. The interest portion is $248.24, and the origination portion is $12. The APR is 11.58%.

Annual Percentage Rate (APR)

The overall average APR for credit builder loans is 7.78%¹, with a range of 0% to 35.99%.

APR is useful as a comparative metric, but it does not provide insight into absolute figures. For example, 10% APR on a 2-year $500 CBL may appear straightforward, but the total interest is $101.91, or 20% of the original value.

Because interest rates apply monthly, loan duration is a key driver of total cost as we saw in the First Federal Bank of Kansas City (18 months) example above.

Interest Rate

Interest rate is the percentage used to calculate monthly installment payments. It is a mandatory loan component (even if lenders offer it at 0%).

Interest rate is part of, but not the same as, APR. The interest rate is a formula input for installment payment schedules, in which the borrower makes equal monthly payments consisting of a progressively smaller interest portion over time.

For example, month 1 and month 12 payments are both $100, but the first is $75 interest and the last is $25 interest.

The sum of interest paid over all installments is an input for the APR formula, which represents the net effective cost of the loan. The difference in formulas for installments and APR result in interest rates reading about two times APR (i.e. 20% versus 10%), but APR includes interest.

In other words, interest rates appear higher than APR, but in reality the comparison is not appropriate because the latter contains the former.

Duration a Key Cost Driver

Duration has a strong impact on APR. Durations of 36 months and longer show a sharp increase in APR from the ~7% average to >10%.

To be clear, total absolute interest paid increases on long duration CBLs, but APR remains virtually constant when controlling for amount. For example, imagine three $5,000 loans at 10% interest (with no other fees). They are 12-months, 24-months, and 36-months respectively.

Total interest on the 12-month loan equals $275, on the 24-month equals $405, and on the 36-month equals $808. However, their APRs differ by less than 0.12%. Here's a visual to demonstrate:

APR is therefore useful as a comparative tool but deceptive in determining total cost because loan duration dramatically increases interest paid when controlling for interest rate and principal amount.

Processing Fee

Processing fees are a type of administration fee that lenders charge for handling the paperwork to administer the loan. They are sometimes simply called admin fees. Many credit builder loans do not charge processing fees and consumers should not assume they are part of the CBL borrowing industry.

CBLs that apply processing fees, however, include processing fees in APR because they are unavoidable costs borrowers cannot circumvent with responsible loan management.

Origination Fee

Origination fees are a type of administrative fee lenders charge for processing and underwriting credit builder loans. The term is sometimes used interchangeably with processing fees and and admin fees. They typically range from 1% to 5% of loan principal. Origination fees are most common on unsecured credit builder loans.

Late Payment Fee

Late payment fees apply when borrowers miss a payment by its due date. Many credit builder loans have flexible late payment fees, but consumers should always ensure on-time payments.

Even if the lender doesn't charge a fee, the missed payment can become a derogatory mark on credit reports. The derogatory mark works against the purpose of acquiring the credit builder loan.

Early Closure Fee

Early closure fees are costs associated with paying off a loan early OR canceling it without payoff. More than 20% of CBLs we track charge allow penalty-free payoff, and 70% of those allow zero-penalty cancellation.

Secured credit builder loans (payment-secured and fully-secured) generally do not charge cancellation fees because the principal amount is held as collateral until the loan is paid in full. CBLs that allow penalty-free cancellation always allow payoff.

No unsecured CBLs allow cancellation because borrowers control cash that must be repaid. However, more than 30% of unsecured CBLs allow penalty-free payoff.

Membership Fees

Some lenders charge membership fees as a prerequisite to borrowing. In the case of MoneyLion, for example, members pay $19.99/month to access the platform, then pay 5.99% to 29.99% in APR that does not include the membership fee.

Other lenders, such as Ava, offer 0% APR loans but still charge membership fees.

Consumer should consider the impact of membership fees, which can be deceptively high. Ava's $6 monthly membership is equivalent to 29% APR, which is one of the highest in our database.

Payment-Secured CBL Costs

Payment-secured CBLs have an average APR of 7.42% that translates to $264 in unavoidable fees. About 22% have no early payoff penalty, and 10% have no cancellation fee. Approximately 15% have 0% APR¹.

Fully-Secured Average Costs

Fully-secured CBLs have an average APR of 4.77% that translates to $720 in unavoidable fees. About 1 in every 2 have no early payoff penalty, and no cancellation fee.

Unsecured Average Costs

Unsecured CBLs have an average APR of 14.83% that translates to about $1,400 in unavoidable fees. About 21% have no early payoff penalty but no have no-penalty cancellation.

Only one unsecured CBL, called DreamSpring, charges 0% interest on its Fast Forward Project Loan. APR can reach 35.99% due to origination fees.

How to Minimize CBL Costs

Consumers can minimize the cost of credit builder loans by focusing on transparent offers from reliable lenders and using the averages mentioned in this article as a benchmark to compare offers before borrowing.

Any good, low-cost CBLs won't have late payment, early closure, or payout fees. They don't require membership fees without providing added value such cash distribution upfront, and they disclose the full amount of interest borrowers pay.

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