Published: 3 August 2023
Updated: 6 February 2024
Author: Noah Gomez
There are three types of credit builder loans (CBLs) called payment-secured, fully-secured, and unsecured. All three help consumers build credit, but each one requires a specific magnitude of collateral at a distinct time. They are designed to accommodate consumers specific credit profiles and specific cash constraints.
CBL types are not the same as loan types. Loan types refer to debt agreements with different purposes, such as mortgages, car loans, and home improvement loans. The purpose of all credit builder loans is to improve credit.
They also not the same as loan components, which refer to contractual terms such as APR, amount, duration, and collateral. Each CBL type has a definitory collateral structure, but instances of one type may have different component values. For example, two payment-secured CBLs may have different APRs but they both have the same collateral structure.
Payment-secured CBLs are the most common. The borrower makes
installment payments into an account, and the lender disburses the
principal amount at the end of the loan. Payments held in savings act as collateral because they provide cash in advance of disbursement.
The value proposition for payment-secured CBLs is building credit and savings for small loan amounts and minimal interest. Self is a popular example.
For example, imagine you get a classic payment-secured option for $1,500 at 7.42% interest over 12 months. Your monthly payment is $130 for a total of $1,561. After twelve months your credit improves and you get back $1,500, which makes the total cost only $61.
Fully-secured CBLs require the borrower deposit the full amount of the loan into a savings account at the start of the loan. The lender pays the the loan account from the savings account automatically. At the end of the loan, the borrower recovers his/her deposit, less interest.
The value proposition for fully-secured CBLs includes credit building and savings like payment-secured CBLs, but it provides minimal effort (since the lender executes payments) and even lower interest rates (since the lender has the loan value in advance). FreeKick is a popular example.
For example, imagine you get a classic fully-secured option for $14,000 at 4.73% interest over 36 months. Your monthly payment is $418 for a total of $15,044. After twelve months your credit improves and you get back $14,000, which makes the total cost only $1,044.
Unsecured CBLs disburse principal at the start of the loan and require the borrower reimburse the principal plus interest in installment payments. This is the same structure as a traditional loan.
The value proposition for unsecured CBLs is not only credit building like the other structures, but also money in advance combined with flexible eligibility criteria and low interest. They help borrowers with subprime credit access cash in ways traditional lenders cannot. Upstart is a popular example.
For example, imagine you get a classic unsecured option for $7,984 at 14.83% interest over 24 months. Your monthly payment is $386 for a total of $9,275. After twelve months your credit improves and you get back $7,984, which makes the total cost only $1,291.
Payment-secured credit builder loans are ideal for consumers who want to build savings as they improve their payment history. Borrowers forego receiving loan proceeds at the start in exchange for lower rates and lower eligibility criteria. Payments are stored in savings accounts or certificates of deposit.
Payment-Secured CBLs have an average principal amount of $$1,500, with a range of $100 to $20,000. They have an average APR of 7.42%, with a range of 0% to 35.00%. They have an average duration of 22 months, with a range of 1 to 180¹.
The differentiating properties across payment-secured CBLs are usually principal amount and APR. Other differentiators include interest kickbacks and interest-earning deposits.
Payment-secured loans with interest kickback reimburse a portion of the interest payments in addition to the principal at the end of the loan. Interest-earning payment-secured credit builders accrue interest on the savings within the savings account or certificate of deposit.
Another important differentiator is the ability to close or prepay the balance at any time with a positive mention reported to credit bureaus, usually "Closed—paid as agreed."
Additionally, customer service and user-interface are differentiators. I prefer to pay more interest if I know the lender will send my money on time and is friendly on the phone.
Fully-secured CBLs are ideal for consumers who are comfortable with their cash reserves and want to improve credit without having to remember monthly payments. They are structured opposite of normal loans because the borrower provides the full principal amount upfront. The lender stores that money in a savings account and draws payments directly from it.
Fully-secured CBLs are most common for account holders who want a minimal effort solution. With one signature, they authorize the bank to handle all the steps to improve their credit.
Fully-secured CBLs have an average principal amount of $14,148, with a range of $50 to $100,000. They have an average APR of 4.77%, with a range of 0% to 15.00%. They have an average duration of 42 months, with a range of 1 to 180¹.
Differentiators across fully-secured CBLs are usually principal amount and duration.
Some credit unions offer non-cash fully secured credit builders. Borrowers pledge their shares as collateral. These are called savings-secured loans.
Rare fully-secured CBLs require a deposit of the full amount and installment payments on the full amount. The borrower effectively contributes 2x the principal amount upfront for 1x principal payment history. The lender disburses the deposit and total payment amount (less interest) upon loan maturity.
Another rare fully-secured CBL is "partial-fully-secured." They require the borrower deposit less than 100% of the principal at the start of the loan and make payments into a savings account on the remaining principal. As of 2024, there are only 4 partial-fully-secured CBLs in the market, although many existed before.
Unsecured credit-builder loans are ideal for people who want to improve their score but have limited cash reserves. They're structured exactly like traditional loans and distribute the funds at the start of the loan. The borrower makes regular payments to reimburse the principal and pay interest.
The difference between unsecured credit builders and traditional loans is eligibility. Unsecured credit builders don't have rigid credit score requirements and provide alternative creditworthiness evaluations that traditional lenders, such as banks, do not have the knowledge capital to manage. Most unsecured CBL lenders are neo-banks with loans available online.
Unsecured CBLs have an average principal amount of $7,984, with a range of $10 to $50,000. Their average duration is 22 months, with a range of 1 to 84. They have an average APR of 14.84%, with a range of 0% to 35.99%¹.
Differentiators in this category are usually credit limits and APR, as well as the presence of hard inquiries for approval. Unsecured credit-builders rarely provide interest kickback or interest-earning savings accounts. They will, however, report as "Close—paid as agreed" if you pay them off early.
Rare examples exist of partially-unsecured CBLs in which the borrower receives less than 100% of the principal at the start of the loan and makes installment payments into a savings account for the remainder. Moneylion is a popular example.
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.
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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