A fully-secured credit builder loan (FSCBL) is a type of credit builder loan for which the borrower initially deposits the loan principal into a secured account in exchange for low interest on a large principal amount. The borrower makes payments like a normal loan and receives the full deposit back at the end of the loan.

It is designed for consumers with weak credit but available cash who want improve their credit with minimal effort. FSCBLs are the second most common type of credit builder loan.

FSCBLs are not the same as secured personal loans, which distribute principal to the borrower upfront and require tangible collateral such as cars and homes. They're also not the same as payment-secured credit builder loans, whose collateral consists of payment over time into a secured account.

Finally, they're not the same as unsecured credit builder loans, which distribute principal upfront and require no collateral yet offer the same flexible eligibility criteria as payment-secured and fully-secured CBLs.

FSCBLs are the second most common CBL because borrowers typically do not like the idea of contributing the full amount of the loan upfront.

However, this collateral structure allows lenders to provide low interest rates and minimizes borrower effort. Busy consumers with cash reserves and subprime credit benefit from them most.

Summary

Example

Imagine you decide to use Navy Federal Credit Union's option for $15,025 over 8 years at 2.75% because you're looking for a healthy spot to place your money.

You put $15,025 into a locked dividend-earning account and Navy Federal gives you $15,025. You then make monthly payments of $191.60 over 96 months for a total of $18,593.83.

Navy Federal then gives you back your original $15,025. You have paid $3,368 instead of $6,500+ at average rates.

Impact on Credit

FSCBLs impact credit by establishing payment history, credit mix, and average age.

Each payment made is a positive mark. As payments accumulate under the same account, the profile thickens and becomes a fuller representation of consumer reliability in the eyes of credit bureaus and lenders.

FSCBLs add installment credit to credit mix, diversifying profiles with a large number of revolving credit accounts (usually as credit cards). Diversification signals healthy management of mixed debt that bureaus and lenders can depend on.

A FSCBL initially decreases the average age of accounts but acts as an anchored account that will improve credit progressively over 10 years. This initial diminishing effect is a common cause of frustration to consumers and underlines the importance of a holistic plan to manage the credit building journey.

These factors are important to credit scoring models as well. Payment history accounts for 35% of score and credit mix accounts for 10% under FICO, and payments account for 40% under VantageScore. Age of accounts represents 15%.

It's important to note that missed payments hurt credit. While missed payments are a non-negligible risk with payment-secured and unsecured CBLs, FSCBLs' collateral structure puts payments in the hand of the lender and essentially eliminates the risk (although penalty-free early closures usually prevent this situation).

Credit Bureau Reporting

FSCBLs are reported to credit bureaus just like personal loans and do not include mention of their credit building nature. This communication is a truthful representation of reality because FSCBLs are by nature secured loans.

Just like a secured personal loan in which the borrower pledges a car (or other tangible asset), FSCBLs limit lender risk with pledged cash. The lender can recover the secured account balance in the case of borrower default.

The added advantage of pledging cash is that borrowers cannot lose assets they need for daily life, which is not true for consumer finance accounts like dealer auto financing in which the vehicle can be repossessed.

Eligibility

More than half of lenders in our database explicitly state that they do not have credit requirement on their fully-secured credit builder¹, and it's likely those who don't publicize the information also have zero requirements.

The reason is that the upfront collateral neutralizes risk for the lender and removes the need to assess borrower creditworthiness.

This means consumers with derogatory marks like late payments, charge-offs, and collections can access FSCBLs without issue, barring they have cash. After periods of hardship and debt payoff, FSCBLs provide an efficient credit rebuilding solution.

Flexibility eligibility is a decisive advantage of FSCBLs, along with minimal effort.

Effort

Many FSCBLs require minimal effort from the consumer. The borrower deposits the full amount into a secured account upfront and authorizes the lender to draw from it to make installment payments.

The borrower does not need to monitor his/her bank account balance to ensure fund availability or include the FSCBL in personal budgeting.

The ease of effort applies options like the Navy Federal example above. The options distribute funds that require monthly payments, but this can be automated with autopay.

As a fallback, they will draw from the savings account to prevent a missed payment unlike other credit-builder types.

An informal survey of 5 consumers found that the leading cause of 30-day late payments is forgetting to pay. Even with auto-pay enables, errors in banking applications and miscommunication have led to delinquent late payments.

It's psychological, but contributing cash in a FSCBLs provides layers of protection against your own forgetfulness.

Limit & Amount

FSCBLs have an average limit of $14,148, with a range of $50 to $100,000. Limit refers to range possibilities offered by lenders, whereas amount refers to the actual value granted. For example, a lender may offer a $1,000 to $2,000 limit range, or $1,500 average, but actually grant $1,200 on average.

Amounts granted are not public information, but the reasonable assumption is that lenders rarely grant maximum limits, so the average amount of FSCBLs is likely less than $8,388.

It's important to align amount with credit profile. Borrowers with $1,000 on derogatory accounts, for example, should generally look for a FSCBL with that amount or more to counterbalance. But borrowers with no history can rely on smaller amounts.

APR (Annual Percentage Rate)

FSCBLs have an average APR of 4.77%, with a range of 0% to 15.00%. These numbers reflect what lenders offer, so actual APR granted varies and is likely less than 4.77% because lenders rarely grant maximum APR.

For example, FreeKick offers 0% APR on deposits over $3,000 (or $149 yearly on smaller amounts). It's not uncommon for FSCBLs to have 0% interest. The reason is that interest represents compensation to the lender for the risk it takes, but secured savings eliminates the risk because lenders hold the money already.

APR is important because it represents cost. Higher APR means more expensive than lower APR on FSCBLs of the same duration.

Length (Months)

FSCBLs have an average duration of 36 months, with a range of 1 to 180, but the most common durations are 12 and 36 months.

Unlike other CBLs, longer durations don't significantly influence amount granted because borrowers are not incentivized to contribute a higher amount upfront in exchange for more payments (even though more payments mean more credit history and therefore better credit).

Longer durations also don't impact APR because the use of full value collateral neutralizes risk for the lender—regardless of duration. Total interest paid increases with duration, however, because each payment period acts as a catalyst for interest calculation.

Early Closure

FSCBLs usually allow early closure without penalty. Lenders provide this flexibility to incentivize borrowers. Because the borrower's deposit is a source of quick liquidity (unlike cumbersome loans with tangible collateral like mortgages), the lender wants as many borrowers as possible.

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.