Credit builder loans (CBLs) are relatively easy to get. They have the lowest approval criteria of any installment credit, with approximately 30% of CBL lenders foregoing credit checks altogether¹. Another 10% only require informal (soft) credit inquiries.

CBLs are able to provide this flexibility because they use savings-based collateral and alternative creditworthiness metrics. Fully-secured CBLs are the easiest to obtain, followed by payment-secured and unsecured types.

Moreover, the steps to obtain a credit builder loan are not harder than traditional loans. They consist of application, approval, and initial payment.

Difficulties in obtaining credit builder loans usually arise from borrower constraints rather than lender criteria.

Borrower demands such as lender type, location, amount, cash distribution, and speed can make finding the right credit builder loan challenging. Borrowers benefit from awareness of these challenges, even though they are rare.

Summary

Credit Requirements

Credit requirements are not a considerable obstacle in obtaining a CBL. Approximately 30% of credit builder loans have zero credit requirements. Another 10% only use informal inquiries on borrower reports to ensure the consumer doesn't have an intentionally abusive borrowing history¹.

These dynamics are clear at the level of each CBL type. Payment-secured CBL lenders have no requirements in roughly 25% of cases, and fully-secured CBL lenders never check credit.

Unsecured CBLs are slightly less flexible. About 85%¹ of lenders check credit because they need protection against unreliable borrowers and cannot rely on savings collateral like secured CBLs. Unsecured CBLs often impose specific credit requirements, including 300 FICO 8 minimum (at least 10% of lenders), and 600 minimum (at least 10% of lenders).

Non-Credit Requirements (Alternative Metrics)

Secured CBLs (payment-secured and fully-secured) work by using savings-based collateral, but unsecured CBLs depend heavily on alternative creditworthiness metrics.

They include

Other criteria include minimum number of direct deposits in a checking account, as well as minimum number of months of employment.

Each unsecured CBL lender chooses alternative metrics, and there is unfortunately no standard. Good credit building planners account for these nuances.

Steps

Consumers may associate credit builder loans' flexible criteria with a lengthy approval process, but the steps are the same as a traditional loan.

First, borrowers must submit an application, which are available online or in person. Most trustworthy lenders provide pre-approval without running a hard inquiry.

If the borrower is pre-approved, the lender provides the terms and condition of the credit builder loan, as well as each specific loan component. If the borrower accepts, some lenders then perform a hard inquiry (if they didn't upfront).

Once the lender approves and the borrower accepts, the first payment is due according to the terms of the agreement and begins the loan term.

The speed of loan distribution is not relevant for secured CBLs because the borrower receives the principal only at the of the loan (this is called savings-based collateral structure).

Unsecured CBLs usually distribute funds in a matter of days. Those originated by online lenders such as Upstart, however, have the added benefit of distributing usually within 24 hours.

The full process is not more difficult than a normal personal loan, but easier than large secured loans for homes, cars, and other tangible assets.

Lender Type

Borrowers with strict requirements for lender type may encounter difficulty finding the CBL they want. For example, less than 5% of credit unions provide unsecured CBLs. Borrowers who want an unsecured CBL from a credit union struggle to find a match.

Moreover, borrowers who prefer dealing with banks may struggle. The reason is that only select regional banks offer CBLs because they require knowledge of subprime lending that traditional institutions don't have. Borrowers should be aware of this dynamic.

Many borrowers prefer credit unions and banks over online lenders because they are more familiar. This can cause frustration because online lenders typically offer the widest variety of CBL types, as well as modern user interfaces and transparency.

Geographical Availability

Borrowers with a preference for banks and credit unions may struggle to find options in their location. Fewer than 20 regional banks provide credit builder loans, and credit unions are geographically limited based on their charter (a legal constraint).

There are nevertheless solutions to geographic limitations that consumers can incorporate in a credit building plan, such as working with credit unions such as Digital Federal and paying an additional membership for nationwide access.

A common frustration arises when consumers want to move quickly, and it may take some time to accommodate the reality that credit building is not overwhelming, but it cannot be correctly executed in a matter of weeks.

Fast Distribution is More Difficult

Borrowers with bank and credit union preferences may struggle to find CBLs with quick distribution.

Online lenders dominate the market for 24-disbursement because they dominate the market for unsecured CBLs. Secured options do not distribute money upfront, so they're not under consideration.

High Amounts are More Difficult

High limit CBLs are more difficult to obtain because they represent more risk to the lender. Borrowers who want large limits may run into challenges.

For example, credit builder loans have an average limit of ~$4,000, with a range of $200 to $50,000. The $50,000 options are all unsecured CBLs with more restrictive eligibility criteria.

Moreover, only one payment-secured CBL from Consolidated Community Credit Union goes as high as $20,000, but most fall in the $200 to $2,000 range. A fully-secured CBL from Navy Federal Credit Union is limited at $30,000, but the second highest is $2,500.

Borrowers with large derogatory accounts must counterbalance with positive history in similar amounts. For example, a $10,000 collections account requires $10,000 in positive history over time. These borrowers need a creative approach to work with CBL lenders.

Cash Upfront is More Difficult

About 80% of CBLs are secured. Payment-secured and fully-secured CBLs do not distribute cash to the borrower upfront because the principal is held in a secured account until the end of the loan as collateral.

Unsecured CBLs, however, distribute upfront. A potential difficulty arises when borrowers want an unsecured CBLs but do not qualify. These borrowers must first leverage a secured CBL, which can be frustrating and is where a credit building plan can help.

Citations

1. Gomez, Noah. 2023. Review of Credit Builder Loan Offers Dataset. ThickCredit.com. Thick Credit. July 24, 2023. https://thickcredit.com/datasets/private-credit-builder-loan-offers.