Credit Builder Loans vs. Personal Loans

Published: 15 October 2023
Updated: 4 April 2024

Author: Noah Gomez

Strictly speaking, credit builder loans (CBLs) are a type of personal loan (PL) that report to credit bureaus as "secured personal loans," but they are designed to improve scores and not to fund an expense. Both loans deposit cash upon signature, but credit-builders deposit funds into locked savings used as collateral, whereas personal loans funds are available to the borrower.

A healthy comparison of credit builder loans to personal loans helps borrowers understand each product's strengths and weaknesses, and choose the best one for their circumstances.

credit builder loans vs. personal loans graphic

The key difference is that credit builder loans focus on improving credit profiles with alternative creditworthiness metrics and savings-based collateral, whereas personal loans focus on funding major expenses (other than education) or the purchase of an asset (other than vehicles and homes).

The primary type of credit builder loan locks principal as savings-based collateral until loan maturity, which contrasts immediate principal disbursement under personal loan structure.

CBLs and PLs are not the same as mortgages, which are loans used in homebuying. They are also not the same as auto loans, which fund the purchase of personal vehicles. Finally, they are not the same as student loans, which fund education.

The term "personal" is misleading because home, car, and education loans are also consumer loans, but personal loans are a category of their own.

Takeaway for Consumers

Consumers use credit builder loans to get approved for other financial products at the best rates, including personal loans. They are accessible, low-cost tools available to bad and good profiles that prevent unnecessary losses on future personal loans, mortgages, auto loans and other debt.

Good programs filter CBLs based on borrower profile. To avoid unpleasant surprises, they carefully plan application timing and amount.

Key Difference

The primary difference between credit-builder and personal loans is purpose. Credit builder loans require borrowers pay the loan before providing money, whereas personal loans provide cash up front to fund purchases.

To improve credit, credit builder loans must accept subprime borrowers at decent rates, which they do with a special collateral structure in which the borrower pays the loan in full before distributing principal. By contrast, personal loans provide funds up front.

A caveat is that one type of credit builder loan provides funds up front without sacrificing rates or availability to bad credit consumers.

Key Similarity

The primary commonality is that credit builder loans report to credit bureaus under the same name as personal loans. This similarity is what enables credit builder loans to function behind the scenes because bureaus and lenders do not see the "credit builder" label.

Readers shouldn't interpret this technique as deceptive because the point of credit is to determine borrower trustworthiness, and the simple act of taking a credit builder loan demonstrates mature and responsible credit management.

Properties Compared

CBLs and PLs share properties in 4 areas. They are consumer highlights, loan specifications, lender conditions, and credit reporting. Our approach uses these four lenses for comparison.

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. Personal loans focus on funding major expenses other than education or assets other than houses and cars, whereas credit builder loans focus on improving credit profiles in order to save on future debt payments such as auto loans.

Similarities. Both loans focus on helping individual consumers and families, rather than companies and other lenders.

Differences. Credit builder loans are debt management tools aimed at improving consumers perceived trustworthiness in the eyes of lenders, whereas personal loans are strictly debt themselves. In this sense, credit builder loans can be tools to obtain better personal loan terms like interest rate and principal amount.

Exceptions. One interpretation suggests that credit builder loans are simply a type of personal loan. This means the purpose of personal loans includes both funding and credit building. However, this position is technical in nature because from the borrower's perspective each loan is distinctly different. In other words, they occupy different niches in the marketplace.

#2 Uses

Summary. Personal loans fund large expenses like weddings and assets like kitchen appliances, whereas credit builder loans create savings and improve credit by establishing payments history, adding to credit mix, and anchoring account age.

Similarities. Both loans focus on consumer borrowing needs. The result of credit-builders is improved credit that procures better rates, whereas personal loans provide debt itself.

Differences. CBLs perform preliminary step in the borrowing process by creating trustworthy profiles, whereas personal loans represent the primary step in borrowing by providing funds.

Exceptions. Unsecured credit builder loans are an exception to the rule because they improve scores and provide funds up front.

#3 Target Borrowers

Summary. Credit builder loans focus on subprime borrowers who struggle for approval or manageable rates with mainstream loans and cards, whereas personal loans focus on borrowers with average credit history and above.

. Both loans target consumers who borrow or plan to borrow money to fund a purchase for which they have uncomfortable cash reserves to purchase outright.

. CBLs target borrowers with limited, zero, or damaged credit profiles, whereas personal loans focus on borrowers with average or better borrowing history.

. There are no exceptions. Any personal loan that lends to subprime profiles is by definition an unsecured credit builder loan. Fewer than 20 unsecured CBLs exist.

#4 Popularity

Summary. Personal loans represent ~2% of total consumer debt¹ and have at least 50% lender penetration, whereas credit builder loans represent ~0.20% of total debt and have a lender penetration of approximately 5%. The reasoning for these figures is italicized below for transparency.

There are an estimated 11,600 financial institutions in the United States, 5,730 of which are credit unions. Because most credit unions offer personal loans, we can assume at least 50% personal loan penetration. Our market research suggest there are between 200 and 750 credit builder loan from banks, credit unions, and online lenders, or approximately 5% penetration.

Another way to think about popularity is personal loans as a percent of all consumer debt. They represent about 2% of all consumer debt and 11% when excluding mortgages. Because credit builder loans report as secured personal loans, we can use the math in the previous paragraph to estimate credit-builders represent between 0.20% of all consumer debt and 0.90% excluding mortgages.

. From a data collection perspective, the Federal reserve collects personal loans in an independent category that includes credit builder loans. Because all credit builder loans are personal loans but not all personal loans are credit-builders, it stands to reason that personal loans are less popular than other debt, and credit-builders even less.

. Credit builder loans are less popular than personal loans, statistically speaking.

. There are no exceptions to popularity figures.

#5 Amount

Summary. Personal loans have a larger principal range than credit builders, but the difference is small compared to much larger student, auto, and mortgage loans.

. Both loans have average principal balances under $15,000, which puts them in a category that's much lower than other kinds of debt.

. Personal loan average amount is $11,281² whereas the most common CBL type has an average of just under $3,000³.

. Two less common types of credit builder loans, called unsecured and fully-secured, bring the average principal amount to as high as $8,000. These other types are not exceptions, but they are less frequent than the normal payment-secured CBL.

#6 Term

Summary. Personal loans usually range from 12 to 60 months, whereas credit-builders can be as short as 1 month and as long as 180 months.

. The most common durations for personal and credit builder loans are 12, 24, 36, and 60 months.

. A large number of credit builder loans offer 6-month terms, which is uncommon for personal loans.

. Some credit builder loans offer 1-month terms. As of writing, there are only 3 options in the market.

#7 Interest

Summary. At 6% — 14%, credit builder loans rates are significantly lower than the average 21% personal loan interest.

. There are no similarities because credit builder loans are designed to have lower rates than other loans.

. On average, credit builder loan rates are about 10 percent points lower, meaning 10% instead of 21%.

. There are no exceptions to interest amounts because this is a key driver of credit builder loan value.

#8 Collateral

Summary. Credit builder loans are secured debt and use collateral to accept subprime lenders at affordable rates, whereas personal loans are unsecured and have no collateral by definition.

. There are no similarities with regards to collateral use.

. The difference is binary. CBLs have collateral and personal loans have none.

. Unsecured credit builder loans do not have collateral, making them an exception to the rule.

#9 Lender Types

Summary. Both are available through banks, credit unions, and online lenders, but CBLs have a clear penchant for digital providers whereas personal loans are equally present across all three.

. Banks, credit unions, and digital lenders provide both loan types. For example, Republic bank, Digital Federal credit union offer both personal and credit-builder loans. Ava is a digital lender for credit-builders, and Prosper is a digital lender for both (specifically unsecured CBLs.)

. Good credit-builders are most common via digital providers.

. The one exception to types is that community monetary funds also provide more credit-builders than personal loans, but these are rare institutions either way.

#10 Lender Opinion

Summary. Lenders see both loan types under the same personal loan category, with the caveat that credit builders are secured personal loans while unsecured is the norm.

. Lenders read both loans the same way on consumer credit reports.

. Credit builders appear as secured, whereas personal loans usually show as unsecured.

. There are secured personal loans that are not credit builders, but they are rare. An example is share-pledge loans, in which the borrower pledges ownership of stocks in publicly-traded companies. Even the closely-related savings-secured loan falls under the credit-builder umbrella.

#11 Impact on Credit

Summary. Both loans contribute to payments history, credit mix, and account age factors in creditworthiness scoring, but credit builders are tailored to borrower profiles whereas credit impact is a secondary feature of PLs.

. Both loans impact the same creditworthiness factors: payment history, credit mix, and account age.

. Credit-builders' secured status may influence creditworthiness in a slightly different way than personal loans.

. There are no exceptions to impact on credit.


In a sentence, credit builders and personal loans look the same on credit reports and share similar principal amount, but their underlying mechanics make credit builders most appropriate for borrowers who want to improve their credit before taking a larger loan.

On the other hand, personal loans are best for use as funding tools.


  1. Board of Governors of the Federal Reserve System. 2016. “Federal Reserve Board - Survey of Consumer Finances (SCF).” Board of Governors of the Federal Reserve System. 2016.
  2. “Credit Card and Unsecured Personal Loan Balances Remain at or Near-Record Levels as Consumers Navigate Challenging Economic Climate.” n.d. Credit Card and Unsecured Personal Loan Balances Remain at or Near-Record Levels as Consumers Navigate Challenging Economic Climate. Accessed October 16, 2023.
  3. 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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