The relationship between credit-builder loans and accounts is best described as synonymous, because accounts are registries that simultaneously record loans transactions. The choice, therefore, is not between loan and account, but which loan & account.

A strong comparison between credit-builder loans (CBLs) and credit builder accounts (CBAs) allows consumers to understand the pros & cons and decide when each product is appropriate for their circumstances.

Takeaway for Consumers

Consumers can think about credit-builder loans and accounts as two sides of the same coin.

Loans are an agreement of principal amount, interest rate, repayment frequency, and other disbursement & payment terms, whereas accounts are important because they define what is (and is not) reported to the three national credit bureaus (Experian, TransUnion, & Equifax).

Key Difference

The key difference between CBAs and CBLs is that the account records and reports transactions, whereas the loan is the agreement & product itself. On Ava's credit builder, for example, you interact with the loan product but each payment is recorded on an account you don't see.

Key Similarity

The core similarity between credit builder accounts and loans is that they reflect information about the same underlying entity. The loan is an agreement to exchange money for reimbursement with interest over time, and the account records the principal disbursement + subsequent payments.

Properties Compared

CBAs and CBLs share properties in four areas known as consumer highlights, specifications, lender conditions, and credit reporting. This investigation uses these four lenses to compare and contrast the products.

*Contrary to other detailed comparisons in this content series, each property section below includes only a summary rather than similarities, differences, and exceptions. The reason is that this level of detail does not systematically exist between loans and accounts because they essentially reflect the same agreement.*

Consumer Highlights

Specifications

Lender Conditions

Credit Reporting

#1 Purpose

Summary. The purpose of credit builder loans is the establish the transfer of money according to agreed terms, whereas the purpose of accounts is to record these transactions in the lender's database and report to credit bureaus.

#2 Uses

Summary. Both credit builder loans and their underlying accounts focus on building consumer profiles so borrowers can ensure loan and credit card approval at favorable interest rates.

#3 Target Borrowers

Summary. CBLs and CBAs target borrowers with below-average credit due to limited, zero, or damaged history. They are not appropriate for consumers with thick credit because low-interest loans and high-value credit cards provide more benefits and credit builder products. This dynamic is called the credit building curve.

#4 Popularity

Summary. The approximate 200 — 750 credit builder loan offers in the market represent approximately 1% of total consumer credit¹, and CBAs are equally popular because each loan has an underlying account.

#5 Amount

Summary. The average credit builder loan principal amount is just over $3,000, and credit builder accounts reflect this on credit reports by reporting to the credit bureaus.

#6 Term

Summary. The most common CBL terms are 12, 24, 36, & 60 months. CBAs will reflect this term on credit reports for up to 10 years even after the loan is paid in full.

#7 Interest

Summary. CBL interest rates typically range from 6% — 14% according to Thick Credit's market research dataset¹. CBAs do not report the rate to credit bureaus, but they do report the total value of each payment that includes principal and interest.

#8 Collateral

Summary. Two of three credit builder loans use collateral. The most common type, called payment-secured, requires the borrower deposit cash collateral progressively with each installment, and fully-secured CBLs require the full amount be deposited up front. Unsecured credit builders do no require collateral.

Credit builder accounts underlying payment- and fully-secured CBLs record this information as security but do not specify whether the collateral is physical.

#9 Lender Types

Summary. Credit builder loans and accounts are available through the three primary lender types: banks, credit unions, and online lenders.

#10 Lender Opinion

Summary. Lenders rely on credit builder loans as proof of borrower maturity, and they view credit builder loans as secured personal loans demonstrating mature debt management.

#11 Impact on Credit

Summary. Because CBLs are reported as secured personal loans, they impact three of 5 credit factors: payment history, credit mix, and account age. Credit builder accounts deploy influence on credit because they control all of the information transmitted to the credit bureaus.

Conclusion

In short, credit builder accounts reflect the additions and subtractions associated with credit builder loans. They are responsible for reporting to credit bureaus, which is for all intents and purposes the only thing that matters to consumers.

Citations