One reason credit builder loans (CBLs) can offer attractive terms is cash collateral. Borrowers front loan principal in a savings account to get approved, so "payout" refers to reimbursement once the loan is terminated.

Payouts only apply to secured CBLs, which require borrowers collateralize the loan by contributing either the full amount upfront or in equal installments over time. They do not apply to unsecured CBLs, which do not require any collateral.

CBL payouts are not the same as principal. Principal refers to the value on which borrowers pay interest, whereas payout refers to cash collateral. In contrast, payout specifically pertains to the return of cash collateral. Imagine, for example, a 12-month secured CBL for $1,000. If the borrower cancels the loan before the full $1,000 principal is paid, the lender pays out less than the principal.

Payouts are also not the same as payoffs, which refers to the borrower's reimbursement of the full principal amount either on time or early. Payoff can instead trigger payout.

Collateral allows secured CBLs to provide flexible eligibility criteria and low APR, but it can cause frustration for borrowers who must wait several weeks after their last payment before receiving funds.

Summary

Payout Amount vs Principal

A source of confusion is the difference between payout amount and principal. Payment-secured CBLs require the borrower make payments into a secured account before receiving loan proceeds.

Those payments represent collateral and equal the principal plus interest. When the loan is paid in full, the lender pays out the principal amount. Under these conditions, payout is equal to principal.

However, if the borrower cancels the loan before the scheduled term, the paid-in amount is lower than the principal balance. The lender therefore pays out a sum lower than the principal.

Payout ≠ Payoff

It's important to note that payouts and payoffs are no synonymous. Payoffs refer to settling the entire outstanding balance on a loan with a single payment either on time or ahead of schedule. In contrast, payouts refer to the return of cash collateral to borrowers.

The relationship between these terms is that a payoff can trigger a payout, but not all payouts require payoff because some loans can be cancelled before paid in-full.

Payouts are Unique to Secured CBLs

Payouts are only relevant for secured CBLs because unsecured structures don't require collateral to be reimbursed.

Payment-secured CBLs require borrowers make payments over time into a secured account and payout when loan is closed. Fully-secured CBLs require borrowers deposit the full loan amount in a secured account upfront from which the lender draws payments. They also payout when the loan is closed.

Consumers with non-critical cash constraints benefit more from secured CBLs because the pool of offers is much larger and the total cost of borrowing is lower.

Timing & Buffer Period

Payouts occur after the loan is closed, which usually occurs at the end of the loan schedule once the loan is paid in full.

Consumers become frustrated to learn that lenders often retain a buffer period to transfer the funds. The original purpose of buffer periods is to allow lenders a reasonable amount of time to process transactions, as well as account for delays due to transfers between banking institutions.

The buffer period usually lasts 2 to 4 weeks, but some lenders take up to 2 months. Payout buffer is usually outlined in the loan agreement, so be sure to read the security term before signing.

Some lenders have a reputation for extending the buffer period beyond 1 month on the basis of fraud detection, so pre-filter responsible lenders in our packages..

Delays due to Suspected Fraud

Consumers have complained about some lenders delaying payouts due to fraud detection—sometimes indefinitely. Customer anecdotes recount examples of lenders claiming suspicious activity on accounts and locking them before payout.

Locking the account prevents payout but does not pause the borrower's obligation to pay. Some borrowers narrate situations in which filing formal complaints trigger fraud flagging.

Claims of fraud are governed by the Electronic Funds Transfer Act, and lenders are generally required to investigate claims within 10 business days of notice, then communicate their findings within 3 business days.

Not all lenders consistently comply with the law, so borrowers who want to avoid legal pursuits should focus on lenders who follow best practices.

As a matter of commercial principle, borrowers should communicate their detailed requests in writing with timestamped delivery to ensure lenders cannot claim miscommunication.

Early Payoff & Cancellation

Borrowers almost always have the option to payoff their CBL early, and at least 10% of lenders¹ offer no-penalty early payoff or cancellation.

Payoffs and cancellations usually constitute the end of the loan, in which case lenders must payout collateral. The buffer period after payout is usually identical to buffer after completing the full loan schedule.

While payoffs are almost always permitted, they can trigger a penalty. Cancellations, on the other hand, are not always permitted and are a competitive feature of strong CBLs.

How to Get Money Back

In theory, the only surefire method consumers can use to get their money back from secured CBL lenders is completing the scheduled loan payments as agreed. No federal law in the United States governs prepayments.

However, few lenders prevent borrowers from paying off their loan early because it has become standard practice. Borrowers can usually get their money back by paying off the CBL balance and requesting payout in writing. Moreover, standard practice for prepayment penalties is to not employ them on CBLs and all personal loans.

The best way to ensure payout is to choose a transparent CBL lender with flexible terms. A good credit builder plan filters out lenders with a reputation for questionable tactics.

Example

Self.inc is a popular online lender of payment-secured CBLs. They payout within 3 weeks after the last payment on the full schedule and provide penalty-free cancellation with payouts on the same timeline.

Self also provides early payoff but requires an additional step (to convince borrowers that maintaining the payment history is better than paying off) before the 3 week period begins.

Customers have complained, however, about questionable payout holds and poor customer service concerning fraudulent activity.

Citations