Analysis reveals 12 percent of payday loan borrowers have good credit

Inside Subprime: June 8, 2018

By Lindsay Frankel

The common perception about payday loan customers is that they are, on the whole, a group with bad credit and no alternatives for borrowing. After all, why would you take out a high-interest payday loan with the potential to trap you in a cycle of debt, if you had the option to use a credit card or get traditional bank financing instead?

But FactorTrust, an alternative credit bureau, has data that shows not all payday loan borrowers have bad credit. After acquiring the company last year, TransUnion sought to analyze data on 28 million people to reveal trends in behavior of payday loan borrowers.

“The assumption was the consumers who participate in this market are very deep subprime or unbanked, that’s why they’re going to these lenders,” said Liz Pagel, vice president of the financial services business unit at TransUnion.

While this assumption proved true for 66 percent of the population in the database, 12 percent of payday loan borrowers were found to be prime or super prime, meaning that they had good or excellent credit. Only three percent of payday loan borrowers had no credit history.

Given the high interest rates and fees associated with payday loans, it’s surprising that people with good credit would use these risky products. Payday loans often carry triple-digit annual interest rates, with payday loans in Ohio costing borrowers an average of 591 percent annually, the highest in the nation. And while 80 percent of customers who took out alternative loans in the past seven years do have subprime credit, a significant number of payday loan borrowers would have qualified for traditional banking services, such as credit cards.

Researchers could only guess why prime and super prime customers would take out loans from predatory lenders.

“It goes back to the idea that if you think about whether it’s a short-term or a personal loan, you have a set payment, a set term, you know exactly how much you owe and you know when it’s going to be over,” said Matt Komos, vice president of research and consulting at TransUnion. “That might be easier for many people to manage than a credit card, which you could easily let get away from you and all of a sudden your payments are unmanageable.”

It’s also possible that prime and super prime customers have grown comfortable using these products, even though they could be served by traditional banks. But while payday loans might seem like an easy and quick solution for fast cash, they perpetuate a cycle of debt that can be more difficult to overcome than debt from credit cards, which generally have much lower interest rates.

Researchers also noted that people who use payday loans are more likely to take out auto and personal loans as well. Pagel suggested that these products may be comfortable for consumers because the process is similar to paying off a payday loan. There was also evidence to suggest that people who regularly use payday loans may be learning good credit behaviors; repeated payday loan borrowers were found to have lower delinquency rates than people who use payday loans only once in a while.

Payday loans are not the only option for quick cash, but they are easily the most expensive. Because personal loan options are available that are less pricey than payday loans, borrowers with bad credit and good credit alike should explore these alternatives before taking out a payday loan.

To learn more about payday lending in the United States, check out these related pages and articles from OppLoans:

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