Credit Builder Loans vs Personal Loans vs Installment Loans: What's the Difference?

Credit Builder Loans vs Personal Loans vs Installment Loans: What's the Difference?

An important part of managing your finances is matching the right type of financing with a purchase. Sometimes it’s obvious—auto loans have auto in the name and the lender generally sends the money directly to the dealership. Similarly, you can easily guess that you can use credit builder loans to help improve your credit.

To understand why credit builder loans might help your credit, let’s first take a look at how credit builder loans compare to personal loans and other types of installment loans. 

What is an installment loan?

Credit builder loans and personal loans are both installment loans, a broad category of loans that have a few distinguishing features:

  • You receive the entire loan amount upfront.
  • You repay the loan with regular payments—the installments.
  • There’s a predetermined loan term. 

Many installment loans also have a fixed interest rate, and your installment payments (often, monthly payments) will stay the same over the lifetime of the loan. 

Some installment loans require you to secure the loan with collateral, which the lender can take if you fall behind on payments. Unsecured loans are offered based on your credit profile and promise to repay the debt. 

Types of installment loans 

There are many types of installment loans, including:

  • Auto loans
  • Mortgages
  • Student loans
  • Small business loans
  • Personal loans
  • Credit builder loans

Most of the names broadly describe how you’ll use the funds, and you can find these loans from various financial institutions, including online lenders, credit unions, community banks, and traditional banks. 

What is the difference between a credit builder loan and a personal loan?

Credit builder loans and personal loans are both installment loans, but they have some unique traits. 

  • Personal loans: Personal loans tend to be unsecured loans that you can use for almost anything. Many people use the funds to pay for emergency expenses, vacations, and weddings. But you can also use a personal loan to consolidate and refinance higher-rate debt, such as credit card debt.
  • Credit builder loans: Credit builder loans are secured loans that you take out to help improve your credit. The loan’s proceeds are locked in a savings account, and the lender reports your monthly payments to the credit bureaus. Depending on the arrangement, you might unlock the loan proceeds as you make monthly payments or get the entire amount when you pay off the loan. 

Both types of loans are pretty flexible in that you can choose how to spend the money once you receive it. However, you wouldn’t use them interchangeably.

In general, credit builder loans are tools that people use to establish, improve, or rebuild their credit. Because the loan is secured and borrowers aren’t spending the money, the loans tend to have low (or no) fees and interest charges. 

People take out personal loans because they want or need to borrow money. Once you have good to excellent credit, you might qualify for a personal loan with a low interest rate and no fees. However, borrowers with bad credit might get charged high fees and interest rates. Some personal loans have even higher interest rates than credit cards. 

Credit builder loans vs personal loans: what’s best for building credit?

With installment loans, how you manage your loan matters more than the specific type of loan. In fact, personal loans and credit builder loans could hurt and help your credit scores in identical ways. 

For example, if you don’t have an open installment loan, the loan could add to your credit mix and help your score. Making on-time loan payments can also help your scores, particularly because your payment history is the most important scoring factor.

However, applying for a loan may lead to a hard credit check, and opening a new account can lower the average age of your credit accounts. These can both hurt your scores a little. Late payments can also hurt your credit. 

Pros and cons of the credit builder and personal loans

It’s important to know about credit builder loans and personal loans as options for improving your credit and managing your finances. However, there are pros and cons to both types of loans. 

Credit builder loans pros and cons

Pros

  • Can be inexpensive. 
  • Doesn’t require good credit to qualify.
  • Can help improve your credit scores.

Cons

  • You don’t receive the loan amount upfront.
  • Could hurt your credit if you miss payments.
  • Doesn’t always get reported to all three major credit bureaus.

Personal loans pros and cons

Pros

  • Doesn’t require collateral.
  • You can use the money for almost anything. 
  • May offer low fees and interest rates based on your credit.

Cons

Comparing the options: which is right for you?

A credit builder loan can be a helpful stepping stone if you’re looking to repair or improve your credit, or if you have good credit but don’t have an open installment loan and want to add to your credit mix.

However, if you need to borrow money, you’ll want to take out a personal loan or look for alternative funding options. Ideally, you can improve your credit scores before applying for a personal loan to increase your chances of getting approved and receiving a favorable loan offer. 

Feature Credit Builder Loan Personal Loan
Purpose Establishing or building credit Borrowing money for almost any purpose
Interest Rate Often very low or no interest charges Low to very high-interest rates
Origination or Administrative Fees Very low or no fees Ranges from 0% to 12% of the loan amount
Loan Amount Starts around $500 to $1,000 Ranges from around $2,000 to over $100,000
Credit Score Requirement None May start around 500
Hard Credit Inquiry Often no Usually yes

If you’re looking for a credit builder loan with no hard inquiry, upfront fees, or interest, the Ava Save and Build account is included with your Ava subscription. The account helps members build their savings while working on their credit. 

You’ll set aside $30 each month, and Ava reports these payments to all three credit bureaus—Equifax, Experian, and TransUnion. At the end of the year, you receive the entire $360 back.

stay in the know

Get updates on new articles and features.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.

similar articles

Finances

4 Ways to Spot Personal Loan Scams and How to Protect Yourself 

Read post
Finances

What Is an Installment Loan and How Do They Work?

Read post