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How Do Borrowers Use Alternative Forms of Credit to Fill in the Gaps?

Using a unique combination of alternative financial services (AFS) loan and credit report deidentified data, we investigate how people who borrow from AFS providers (such as payday lenders) interact with mainstream credit providers. We find that (1) the majority of first-time AFS users had interacted with mainstream credit before using AFS credit, and about 52 percent of these adults had an open credit card or other revolving debt; (2) an increasing share of adults had access to mainstream credit in the months before obtaining their first AFS loan; and (3) AFS borrowers were less able to pay their mainstream debts after obtaining their first AFS loan, with the credit card delinquency rate increasing from 18 percent in the quarter they obtained their first AFS loan to 34 percent five quarters later. We conclude that programs that help consumers rebuild their credit and set aside emergency savings so they do not need high-cost credit in the future might benefit potential AFS users.

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Posted in: Grey Literature on 06/13/2021 | Link to this post on IFP |
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