A payment-secured credit builder loan (PSCBL) is the most common type of credit builder loan in which the borrower makes installment payments into a savings account and recovers the principal at the end of the loan, less interest.

It is designed for consumers with limited or damaged credit and limited cash.

PSCBLs are not the same as secured personal loans, which distribute principal upfront and require the borrower pledge car, home, or other tangible collateral.

They're also not the same as fully-secured credit builder loans, which require the borrower deposit the full amount into savings upfront from which the lender draws payments.

Finally, PSCBLs are not the same as unsecured credit-builder loans, which have flexible eligibility criteria but require no collateral and distribute cash upfront.

PSCBLs' savings collateral structure provides a mutual benefit to borrowers and lenders. Each installment creates payment history and credit mix for the borrower and simultaneously provides protection to the lender.

That protection allows the lender to provide flexible eligibility criteria and accessible interest rates while lending an amount of principal credit bureaus take seriously.

Summary

Example

Imagine you get Ava's credit builder loan. You pay a membership fees to obtain a 0% interest loan for $306 over 12 months.

The monthly loan payment is $25.50 and the monthly membership fee is $6 for a total of $378 after 1 year. Ava then gives you back $306.

This means you pay only $72 ($378 - $306) for 12 months of payment history added to your credit report and the boost that comes with it.

Impact on Credit

PSCBLs impact credit by creating payment history, diversifying credit mix, and anchoring average account age.

Specifically, each payment represents a positive mark on your credit report that signals reliability and consistency to bureaus and lenders.

The presence of an installment account diversifies reports that usually consist primarily of revolving credit (credit cards), which signals responsibility to bureaus and lenders.

The creation of the account will at first harm credit by lowering the average age but anchors it to improve credit over time. Bureaus and lenders like older accounts because they're thick and more reliable.

These dynamics are important to credit score 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%.

Missed payments, however, become derogatory marks that hurt credit profiles. PSCBLs do not go to collections because the borrower does not have a cash obligation. In addition, credit reports with more than 4 existing installment accounts will benefit less from diversification, shown by studies at the National Bureau of Economic Research².

Credit Bureau Reporting

With PSCBLs, the lender reports installment payments to credit bureaus just like a normal loan. The fact that the loan is a credit-builder is immaterial to bureaus because the choice of collateral structure belongs to the lender.

For example, secured personal loans are reported simply as installment loans despite their use of physical collateral like cars and homes as collateral. The same applies to credit-builders.

It's important to note that lenders choose which credit bureaus they report to and which ones to use for creditworthiness assessments. The three nationwide credit bureaus, or consumer reporting agencies, are Experian, Equifax, and TransUnion.

Borrowers generally prefer PSCBLs that report to all three to minimize risk of denial. For example, PSCBL borrowers could discover from a mortgage lender that the CBL does not appear on the bureau report used for the home loan. It therefore does not lower mortgage APR, or worse, cost them the mortgage approval.

Eligibility

Approximately 30% of PSCBLs do not include credit as an eligibility requirement. This means borrowers with no history or bad history (who would be denied for other loans) can get them without subjection to alternative verification like debt-to-income ration (DTI).

Subprime approval is made possible by the savings secured collateral structure, low principal amounts, and interest. Online lenders often propose pre-approval.

The remaining 70% of PSCBL lenders examine the borrower's income and assets, as well as existing savings, to gauge whether a minimum score is required. While the minimum varies, a 500—600 range is typical and scores as low as 405 have been granted.

In other words, anyone can be eligible for a PSCBL from the right lender.

Limit & Amount

The average limit on PSCBLs is $1,500, with a range of $100 to $20,000. As with personal loans, 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 grant $1,200 on average.

Amounts granted are not public, but the reasonable assumption is that lenders rarely grant maximum limits, so the average amount of PSCBLs is likely less than $1,500.

It's important to align amount with existing credit profile. Borrowers with $2,000 derogatory accounts, for example, should generally look for a PSCBL with that amount or more to counterbalance. But borrowers with no history can rely on smaller amounts.

APR (Annual Percentage Rate)

The average APR on PSCBLs is 7.42%, with a range of 0% to 35.00%. Because this is an average APR ranged offered, actual APR granted is likely lower assuming lenders rarely grant the maximum in their range.

That said, over half the PSCBLs in Thick Credit's database¹ provide a flat rate, so the difference between APR offered and APR granted is smaller than the difference between limit and amount granted.

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

Length (Months)

The average duration on PSCBLs is 22 months, with a range of 1 to 180. This is an arithmetic mean, but the most common durations are 24 and 12 months, followed by 36 and 6 months.

Longer durations typically accompany higher limits. Durations of 24 months have an average limit of approximately $1,200 and durations of 12 months have an average of about $750.

Length is important because it represents the quantity of positive payment history and because it impacts cost. Longer PSCBLs create more positive payment history, but they will increase the total interest paid compared to a shorter loan of the same APR.

Borrowers can focus on aligning loan length with existing profile. Those with 90 day+ late payments and charge-offs will need more counterbalancing payment history, whereas those with no history can aim for 6 - 12 months.

Savings

PSCBLs create savings by depositing each installment payment into a savings account or certificate of deposit that the borrower recovers, less interest, once the account is closed.

Borrowers who prioritize savings would benefit more from a simple budgeting plan due to the interest expense associated with PSCBLs (although 0% options exist), but those who prioritize credit have the double benefit of credit building plus savings.

Thickening credit saves more in the long term, so it's common for borrowers to prioritize credit.

Early Payoff or Closure

Many PSCBLs allow borrowers to close their account early without paying off the loan, for zero penalty. In most cases, the closure is reported as "Closed—paid as agreed" and the paid-in principal is paid back.

This flexibility is possible because the borrower is not in possession of the principal amount and no outstanding cash is payable to the lender, whereas a traditional loan borrower owes cash until the final payment.

The borrower can also pay off the loan in full, but this is less common given that the payoff is reimbursed almost immediately. In either case, a penalty for early termination is rare.

Lenders

Credit unions, banks, online lenders, and community funds provide PSCBLs. By count, credit unions are the most populous (˜63%), followed by banks (~24%), online lenders (~11%), and community funds (~2%).

However, Thick Credit's market research¹ suggests the majority of PSCBLs are originated by online lenders. Possible reasons include quick action, transparent terms, readily-available customer reviews, and fluid user experience that credit unions and banks struggle to provide.

Citations