An unsecured credit builder loan (USCBL) is a type of credit builder loan in which a specialized lender uses alternative creditworthiness metrics to accept subprime borrowers who then receive principal at closing and repay it on a normal installment schedule. Traditional lenders are not equipped to use these alternative assessments and must reject consumers with conventionally poor credit profiles.

USCBLs are specifically designed for borrowers with limited cash and poor credit, and they are the least common type of credit builder loan.

USCBLs are not the same as personal loans, which have stricter eligibility criteria and require specific uses such as home improvement. They are also not the same as secured personal loans, which require a form of tangible collateral such as a car title.

They are different from payment-secured credit builder loans (PSCBLs), which require the borrower make payments into a secured account and disburse principal at the end of the loan.

Finally, they're not the same as fully-secured credit builder loans (FSCBLs), which require the borrower deposit the full value of the loan upfront into a secured account.

USCBLs are popular with consumers who need financing but are denied for personal loans or face abusive interest rates on payday, pawn, and title loans. They're useful for consumers finishing hardship plans and debt payoff plans, or those who have already used a payment-secured credit builder loan.

Summary

Cash Up Front

The advantage of unsecured credit-builders over secured loans is that they provide cash up front in addition to flexible eligibility criteria. They are in high demand because consumers with poor credit usually can't access normal loans to obtain liquidity.

They are able to both provide money and accept poor borrowers because their lenders specialize in alternative creditworthiness assessment.

Can you really borrow money with a credit builder loan?

Yes, the purpose of unsecured credit-builder loans is to provide money up front like traditional personal loans. Unlike traditional loans, unsecured credit-builders accept borrowers despite poor credit by looking at alternative risk factors.

Example

Imagine you obtain a credit builder loan at Newtown Savings Bank for $1,500 at 24.76% interest over 24 months. You receive $750 up front less a $25 processing fee for a net of $725, and the remaining $750 is placed in a locked savings account.

Your monthly payment is $79.88 for a total of $1,917.11 over 2 years. Once paid in full, Newtown Savings Bank gives back the $750 previously locked in savings.

In other words, you received $1,475 in total, and your total cost of borrowing is $442.11, composed of the $25 processing fee and $417.11 interest. It's important to note that you receive $725 at closing and $750 at payoff.

Impact on Credit

USCBLs build credit by providing payment history, credit mix, and an anchor for account age., which three of five credit factors impacting your FICO score.

Every payment the borrower makes on the USCBL becomes a positive mark on his/her credit report. Over time, the accumulation of timely payments signals consistency and reliability to credit bureaus and lenders. Payments, however, are insufficient when account types are not diversified.

Credit mix improves with the use of USCBLs because they represent installment credit on a credit report. Most consumers have a majority of revolving credit (credit cards), as well as older installment accounts. Adding a new installment line signals a grasp of credit types to bureaus and lenders, encouraging them to trust borrowers.

Account age will initially decrease with an USCBL because it will be new, but with time the it acts as an anchor to improve the profile. The initial drop, which usually manifests in credit score, is a common frustration for consumers and justified the use of a credit building plan to manage expectations and avoid impulsive decisions.

Impact on Credit Score

These dynamics are important to credit score 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%. Other scoring models like Equifax's OneScore rely on similar breakdowns.

The positive impact of USCBLs stops when borrowers miss payments. Like traditional loans, missed payments appear as negative marks on credit reports.

Credit Bureau Reporting

Unsecured credit builder loans report as normal installment credit lines to credit bureaus. Just like a traditional personal loan, the purpose of the loan is immaterial to credit bureaus. Bureaus report amount, duration, payment history, and status because these are the driving factors of creditworthiness.

The exception to this rule is home loans, which lenders almost always report with a mortgage remark. Other exceptions may arise when lenders or consumer financing options provide dynamic offers. For example, Apple offers Apple Card Monthly Installments (ACMI) on select products, which is functionally installment credit but reports as revolving credit.

Credit bureau reporting is important because the bureaus centralize consumer data that lenders use to evaluate creditworthiness.

Eligibility

A 600 FICO 8 score is the minimum credit score for at least 10% of USCBL providers, although 10% require a score as low as 300. The second criteria is a debt-to-income (DTI) ratio of 50% or less.

Additional requirements include the absence of bankruptcies in the preceding 12 months and fewer than 6 hard inquiries in the preceding 6 months.

These figures confirm unsecured credit builder loan eligibility is stricter than the other two credit builder loans but more flexible than traditional personal loans.

Because they don't require collateral, unsecured CBLs must compensate for higher borrower risk than PSCBLs and FSCBLs, but they use adjusted interest rates and alternative creditworthiness metrics to generate flexibility compared to traditional personal loans.

Limit & Amount

The average USCBL limit is $7,984, with a range of $10 to $50,000¹. Limit refers to the possible value of loan principal, whereas amount is the actual dollar value granted.

A reasonable assumption is that lenders do not grant a substantial number of maximum limits, so the average amount is likely less than $7,984.

Limit is important because it must align with borrower cash requirements and credit profile. Large delinquent accounts benefit from USCBLs of the same value or greater irrespective of borrower cash needs.

For example, a borrower with $5,000 in delinquent accounts will see greater counterbalancing effects from a CBL of $5k or more, even if he/she only needs $1,000 in cash.

APR (Annual Percentage Rate)

USCBLs have an average APR of 14.83%, with a range of 0% to 35.99%¹. These figures are represent ranges lenders offer, and actual APR granted is likely lower based on the assumption that lenders rarely grant range maximums.

APR is important because it represents cost. Higher APR means higher interest on two on loans of the same length, but a longer loan can have higher APR even if it's interest rate is lower.

Borrowers often look at the absolute value of installment payments (which can be the same for loans of different lengths), but keep in mind that this is a complex formula composed of length, principal, and interest.

Lower APR saves you money on two loans of the same length and amount, but changing either length or amount can corrupt the value of the comparison.

We will likely never see a fully transparent comparative metric, which is why having strong credit to optimize your chances is the only surefire way to save money on debt.

Length (Months)

USCBLs have an average duration of 22 months, with a range of 1 to 84¹. These figures are arithmetic, and normal durations are 12 and 6 months. Longer durations typically accompany higher limit.

Duration is important because it simultaneously impacts payment history and cost. Payments accumulated over longer durations have a stronger positive effect on credit than short durations.

Interest calculations on installment loans are computed each period, which results in larger total interest expense on longer durations versus shorter ones.

Borrowers must align loan duration to their profile. A consumer with multiple collections on previous installment lines benefit from extended positive payment history that will improve credit and minimize future interest expense.

Those with minimal derogatory marks, however, have little need for additional payments and can save on interest by minimizing loan duration.

Early Payoff

At least 60% of unsecured CBLs can be paid off early without penalty. This aligns with traditional personal loans, which only charge early payoff penalties in rare cases.

Early payoff is beneficial when borrowers achieve their cash or credit goals and no longer need the loan. Paying off a loan early eliminates the interest cost that would be spent on future periods because interest rate calculation occurs each payment period.

Unlike payment-secured and fully-secured CBLs, early closure is not authorized for USCBLs because the borrower holds principal that must be reimbursed. By design, unsecured loans do not have a payout component.

Lenders

Online lenders represent 60% of unsecured CBLs lenders, followed by credit unions with 30% and banks with 10% based on our database¹.

The reason online lenders are the most common is their use of alternative creditworthiness metrics that characterize USCBL value. Traditional lenders like banks and credit unions do not have the skill set or risk-assessment framework to provide flexible eligibility criteria.

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.