Limited Options for Borrowing: The Non-prime Experience

Introduction

The broad discussion in many circles about the plight of people with nonprime credit scores often uses assumptions about how these Americans think, what matters to them, and even what would be good for them. However, there is limited data that really explains their circumstances.

In this study, we set out to understand which “ideal” ways to cover unexpected expenses are available to nonprime Americans.

This study represents results from a survey of 600 nonprime Americans conducted in January 2016 and was designed to understand their borrowing behavior.

Executive Summary

Nonprime Americans have limited personal resources to weather unexpected expenses:

  • 69% could not cover an urgent $500 expense with their savings
  • 36% could borrow $500 from a family or friend; a third of those could not borrow $2000
  • Only 29% could borrow $2000; and a quarter of them wouldn’t borrow $500 from them
  • Only 1 in 5 have borrowed money from family and friends in the prior 12 months

Nonprime Americans have limited access to traditional lending products:

  • 72% of nonprime Americans could not be able to put $500 on a credit card; 80% would not be able to put $2000 on a card
  • 59% cited “regularly” carrying a credit card balance from month-to-month
  • 7% used overdraft protection strategically, to cover expenses for which they didn’t have the money

Covering urgent expenses with savings

The best option for covering an urgent, unexpected expense is to cover it with personal savings. Unfortunately, few nonprime Americans have that ability.

Option to use savings to cover an urgent expense

Q.18dd: If you were in a situation where you needed quick access to $500, which of the following options would be available to you?  Select all that apply.

Availability of credit: Family and friends

Informal, relationship-based options for emergency loans are largely not available to nonprime Americans.

64% of nonprime Americans would not be able to borrow $500 from family or friends if an urgent need arose.

71% would not be able to borrow $2,000.

“Debt available to you”:

Family or Friends

A third of those who feel like they could borrow $500 from family or friends, feel that they would not be able to borrow $2,000.

Option to borrow from family or friends

A quarter of those respondents who feel they could go to their family members for $2,000, simply don’t feel that they could (or, possibly, would) go to them for $500.

Option to borrow from family or friends

Q.18dd: If you were in a situation where you needed quick access to $500, which of the following options would be available to you?  Select all that apply.

Debt used: Family and friends

1 in 5 nonprime Americans borrow money from a friend or family member in the prior 12 months.

Loans used by Nonprime Americans

S.8: Which of the following types of loans or debts have you used in the past 12 months?

Availability of credit: Credit Cards

For most prime Americans, credit cards are the first source of emergency funds. For nonprime Americans, that option isn’t as available.

72% of nonprime Americans would not be able to put a $500 expense on a credit card if an urgent need arose.

A $2,000 need was even further out of reach: 80% would not be able to borrow.

“Debt available to you”:

Credit Cards

Q.18dd: If you were in a situation where you needed quick access to $500, which of the following options would be available to you?  Select all that apply.

Carrying a credit card balance

59% of nonprime Americans reportedly carried a credit card balance regularly in the prior 12 months.

Loans used by nonprime Americans

Financial Life, Dec. 2016. Q18r: Carried a credit card balance- Please indicate how often you engaged in the following financial activities in the last 12 months

Intentionally over-drawing a checking account

More than 1 in 20 nonprime Americans used their bank’s overdraft as strategically, as a form of credit when they needed money.

Debt used in the prior 12 months

S.8: Which of the following types of loans or debts have you used in the past 12 months?

Nonprime Americans

“Subprime” is often used to represent people with scores below 640. People with 641 to 700 are sometimes called “near prime.” We have elected to use the clearer designation of “nonprime” for all consumers with scores below 700.

“Nonprime Americans” represent the New Middle Class. These are Americans with a credit score below 700, meaning that their access to credit is limited or curtailed. It is the Center’s objective to better understand their experiences, attitudes, and behavior.

Methodology

The primary purpose of this study was to explore how nonprime Americans borrowed money.

Interview Dates: December 18-January 12, 2016

Sample Specs:

  • Total Respondents = 600
  • Sample Source: Remesh

Qualification Criteria:

  • Ages 18-64
  • Personal income < $150K
  • Geography – live in a Rise/Elastic state
  • Have checking account or debit card
  • Self-reported FICO score < 700
  • or, Sometimes or always struggle to pay bills
  • or, Used subprime lender in past 12 months

Survey Instrument: 18 minute online questionnaire conducted by Research Now

Article By:

Jonathan Walker

Jonathan Walker

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