When Liz Pagel and Matt Komos began analyzing a slew of alternative credit data gathered by FactorTrust, an alternative credit bureau TransUnion acquired last year, they sought to understand the behavior of consumers who use payday loans, pawnshop loans, auto title loans, rent-to-own arrangements and “buy here, pay here” credit.

(FactorTrust has a “give to get” model — lenders provide trade line reporting and receive industry data. FactorTrust tracks data on 28 million people.)

“We really wanted to see who might be a better credit risk than one might think,” said Pagel, vice president in TransUnion’s financial services business unit. “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. When we looked at the population in the database, we found that 66% of them are subprime, riskier than the general population.”

But 12% turned out to be prime and super prime. Only 3% were unscored.

"There's clearly some demand for credit that's not being met by traditional lenders,” said Pagel, co-author of the new study, “The Spectrum of Lending: Completing the Consumer Picture."

The researchers couldn’t say exactly why customers with higher credit turned to payday loans. Maybe they had an emergency and needed quick cash.

“They might just like the way the process compared to a traditional loan,” said Matt Komos, TransUnion’s vice president of research and consulting.

Payday lender signage
Payday lender signage Bloomberg News

When they looked at all the historical data for the past seven years, they found that 80% of consumers who take out alternative loans are subprime.

“But again, that means there's this notable segment that's not subprime, so they would qualify for other products,” Pagel said.

“Consumers have gotten comfortable with this short-term product, they like to use it,” Komos added.

The researchers then looked at what other credit these short-term borrowers have and found 75% have traditional credit, too.

“When we're talking to traditional lenders, the message is, ‘These are your customers,’ ” Pagel said. “Your customers are active in this market. There's something they're doing that you're not filling in their full wallet need.”

Komos and Pagel then compared people with the same risk profiles in the alternative credit bureau and TransUnion’s normal credit files.

Those in the alternative database received much smaller personal loans — just under $2,000, as compared to just under $3,000 for customers with normal credit files.

“The way they view credit might be slightly different,” Komos said. “They may say, ‘I only need $2,000 so don't give me $3,000. That's all I want.’ 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. 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.”

The researchers note people who use alternative credit disproportionately use more auto and personal loans.

“The look and feel of a personal loan might be more similar to a short-term loan,” Pagel said. “Maybe that's just more familiar to them. The auto loans you can explain because unless you live in New York, everybody needs a car. So disproportionately they're getting those products but they also have bank cards, private-label cards, so they're active in all these markets.”

The bottom line, the researchers said, is that there are 20 million subprime consumers a lender could easily exclude. But some of them are creditworthy.

For instance, people who use short-term alternative loans repeatedly have lower delinquency rates on traditional credit than those who only get a payday loan once in a while.

“So the people using short-term alternative credit to finance their lives are learning good credit behaviors,” Pagel said. “They’re learning to make sure they have the money in their bank account when the loan is due.”

Underlying all this is an unspoken pitch for lenders to buy TransUnion’s FactorTrust data, so they could see such behaviors and know what to look for in the loan applications they receive.