Credit Builder Loans vs. Debt Consolidation Loans

Published: 29 October 2023
Updated: 4 April 2024

Author: Noah Gomez

An insightful comparison of credit builder loans (CBLs) to debt consolidation loans must help consumers decide which is best for their situation by highlighting the important pros and cons of each option.

credit builder loans vs debt consolidation loans

The relationship between debt consolidation loans (aka debt conso loans or DCLs) and CBLs is best defined as sequential.

Debt consolidation helps consumer-debtors combine ≥2 debts with problematic interest or payment terms into a single loan, whereas credit builder loans help consumers build their profile to preempt the issue and obtain favorable rates on debt consolidation and other loans/cards.

Takeaway for Consumers

Debt consolidation loans simplify and potentially save money on multiple debts, whereas credit builder loans make them affordable from the start.

Both products impact the same credit factors, but consolidation's payoff of existing debts cuts short their age and loses those benefits.

Key Difference

The primary difference between these products is purpose. Debt conso loans are debt management tools that simplify debt payments and potentially save on interest, whereas credit builder loans are credit improvement tools that create a profile worthy of approval and low rates on future debt.

Key Similarity

Debt consolidation and credit builder loans both use installment structures with fixed end dates and principal amounts that impact payment history, credit mix, and account age credit factors.

Properties Compared

Consumer Highlights

  • Purpose
  • Uses
  • Target Borrower
  • Popularity


  • Amount
  • Term
  • Interest & APR
  • Collateral

Lender Conditions

  • Lender Types
  • Lender Opinion

Credit Reporting

  • Impact on Credit

#1 Purpose

Summary. Credit builder loans focus on improving credit profile for future debt, whereas debt consolidation loans combine current debts into a single installment plan.

Similarities. Both products help consumers minimize cost on current or future loans.

Differences. CBLs prepare borrowers for future debt by improving credit profile, whereas DCLs help borrowers with current unmanageable debts either due to quantity, terms or interest rate.

Exceptions. Select unsecured credit builder loans can be used for debt consolidation purposes.

#2 Uses

Summary. DCLs fund use-cases are exclusively the combination of 2 or more current debts into a single installment plan with a degree of flexibility surrounding the number of loans combined. Excepting unsecured structures, CBL funds must be stored in a savings account as collateral until paid in full and subsequent distribution.

. There are no usage similarities between CBLs and CBCs.

. The use-cases for CBLs and CBCs are decidedly different: builders prepare for future debt with savings-based collateral structures while consolidators assist on current debts.

Unsecured CBLs can be used to consolidate, although few lenders allow it.

#3 Target Borrowers

Summary. Debt consolidation targets borrowers with 2 or more debts considered unmanageable either due to magnitude of payments or interest, but credit building loans target borrowers with thin credit files planning to acquire credit cards, or home, auto, student or business loans.

. Target profiles for DCLs and CBLs are often the same people at different stages because CBLs help plan for debt, and DCLs help manage debt once consumers have it.

. Borrowers with a large number of cards and loans may not benefit from credit builder loans, but will benefit from DCLs when payment terms are unmanageable.

. There are no exceptions to target borrowers between CBLs and DCLs.

#4 Popularity

Summary. Approximately 200 - 750 credit builder loans exist in the market, whereas debt consolidations loans are popular tools available at a large number of lenders.

. Most lenders offering credit builder loans also offer debt consolidation loans, but not all lenders offering consolidation also offer builders.

. While there is no precise data, debt consolidation loans are available at a large number of lenders whereas there are an estimated 200 - 750 credit builder loans in the market.

. There are no exceptions to popularity metrics between CBLs and DCLs.

#5 Amount

Summary. Credit builder loans have an average principal amount of approximately $3,000, whereas debt consolidation loans can be as high as $50,000.

. Common principal amounts for both types range from $500 to $5,000, with ranges up to $50,000 for borrowers with high income.

. Credit builder loan amounts are generally fixed and must meet or exceed the amount of any derogatory debt on consumer credit files, whereas debt consolidation loans must meet the amount of existing debt to be paid off post-signature.

. There are no noteworthy principal amount exceptions for CBLs and DCLs.

#6 Term

Summary. The most common term lengths for credit builder loans are 12, 24, 36, and 60, whereas debt consolidation loans can be as long as 7 years depending on the payoff amount.

. CBL and DCL lengths number in years.

. DCL maximum terms can be 2 years longer than CBLs for most providers.

. Rare CBLs for lenders willing to commit above-average principal amounts to savings last as long as 15 and 10 years.

#7 Interest

Summary. DCL interest for average consumers generally range from 10% to 35.99%, whereas CBL interest is decisively lower at a range of 6% to 14%¹.

. Acceptable interest rates for both loans must never surpass 35.99%, which is the generally-accepted cap above which lenders engage in predatory practices.

. On average, credit builder loans' use of savings-based collateral enables them to offer rates systematically 10% lower than DCLs.

. Unsecured credit builder loans, which do not use collateral by definition, charge rates similar to debt consolidation loans.

#8 Collateral

Summary. The most common credit builder loan type, called payment-secured, requires the borrower pay the full value of the loan as collateral installments before recovering the loan principal, whereas debt conso loans have zero collateral requirements.

. There are no similarities between credit builder and debt consolidation collateral requirements.

. Collateral is the driving force behind credit builder benefits, whereas collateral does not fit the purpose of debt consolidation loans because they are a means to resolve problematic debt — not add constraints to the borrower.

. Unsecured credit builder loans do not require collateral and can be used for debt conso.

#9 Lender Types

Summary. Banks, credit unions, and digital providers are sources of both credit builder and debt consolidation loans, but the best CBLs are most common through digital providers.

. The three core lending institutions (banks, credit unions, & digital lenders) provide both CBLs and DCLs. For example, Prosper is an online lender that offers both.

. The best credit builder loans offers come from digital providers, whereas debt conso loans are available equally across banks, credit unions, and online lenders.

. Some unsecured CBLs via online lenders double as debt consolidation loans and offer competitive terms.

#10 Lender Opinion

Summary. Lenders interpret credit builder loans as secured personal loans and debt conso loans as normal personal loans, with the same seriousness as any installment debt.

. Lenders view CBLs and DCLs as personal loans.

. The difference is that they understand credit-builders are collateralized and that DCLs are not.

. There are no exceptions to lender opinions of CBLs and DCLs.

#11 Impact on Credit

Summary. As installment loans, CBLs and DCLs impact 3 credit factors called payment history, credit mix, and account age. However, debt consolidators can negatively impact all factors because they pay off other debt (thereby closing the accounts) contributing to the same factors. These factors impact both report and score.

. Both CBLs and DCLs impact 3 of 5 credit factors: payment history, credit mix, and account age.

. Debt consolidation loans can hurt payment history by paying off other accounts, impact credit mix if used to payoff credit cards, and limit account age by neutralizing the "active" status on other loans and removing revolving lines.

. There are no exceptions to credit impact between CBLs and DCLs.


Altogether, credit builder loans are a preventative measure that establish sturdy profiles and prevent high interest, whereas debt consolidation loans are debt management tools to simplify and potentially save on two or more troublesome loans or cards.

Moreover, the relationship can be described as sequential because credit builder loans can help consumers procure better rates on debt consolidation loans in the future.


  1. Gomez, Noah. 2023. Review of Credit Builder Loan Offers Dataset. Thick Credit. July 24, 2023.

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About the Author

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.

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