40% of Subprime Borrowers Have Applied for BNPL

Despite significant systemic barriers, consumers classified as subprime remain active participants in the credit market, seeking both traditional products and alternative options to manage finances and improve their credit standing, according to a new PYMNTS Intelligence report.

The report, “Subprime Borrowers Flock to Alternative Options Due to High Credit Card Denial Rate,” defines subprime consumers as those with credit scores less than 620. It highlights the considerable challenges these individuals face in accessing traditional forms of credit, as the financial system often views them as high-risk borrowers. This perception persists despite many subprime borrowers potentially having the capacity to repay lower dollar amounts over time.

Traditional banks, in particular, are described as ill-equipped to underwrite this segment. As a result, subprime borrowers frequently encounter high denial rates for conventional products, driving them toward alternative solutions such as payday loans, credit-builder loans and buy now, pay later (BNPL) services to cover essential purchases and address cash flow gaps. The findings are based on insights from a survey of 2,330 United States consumers conducted from Jan. 14 to Jan. 23.

Contrary to perceptions of irresponsibility, a significant portion of subprime borrowers proactively attempt to improve their credit standing. Many strategically use available credit, including for both essential and nonessential purchases, with the specific intent of demonstrating responsible financial behavior and raising their credit score.

However, the report noted that not all alternative credit providers report to credit bureaus, potentially making these efforts invisible to traditional lenders. Despite the challenges and the use of alternatives, access to traditional credit remains a significant financial goal for subprime borrowers, underscoring an aspiration to participate more fully in the mainstream financial system.

Key data points from the report include:

• Bank denial rates for subprime applicants are 2.3 times higher for credit cards than those for super-prime borrowers. Data shows that 29% of subprime consumers have applied for and been denied a credit card, compared to just 12% of super-prime consumers.

• Fifty-seven percent of subprime borrowers have access to credit cards. Among these, 21% specifically use their credit lines for essential purchases to improve their credit score. Furthermore, one-quarter of subprime consumers use credit for nonessential expenses with the explicit goal of raising their credit score, being 30% more likely than high-score consumers to do so.
• Subprime borrowers seek and use alternative credit options at higher rates. Forty percent of subprime borrowers have applied for BNPL, compared to 27% of super-prime consumers. Subprime consumers are also 2.1 times more likely to have applied for a payday or credit-builder loan than those with higher credit scores.

The report highlights that subprime consumers are, in general, trying to access traditional credit products at rates similar to other consumers, even while being more likely to apply for loans and BNPL services.

These consumers remain an underserved market, often characterized by higher rates of unemployment, lower incomes and younger age, factors that contribute to their perception as high risk by lenders. Despite these barriers, subprime borrowers show significantly higher interest in obtaining new credit cards (3.6 times more likely than super-prime), as well as other loan types such as personal loans, mortgages and auto loans. They are also proactively seeking ways to manage existing debt, with subprime consumers being twice as likely as high-score consumers to show interest in obtaining a debt consolidation loan.

These findings underscore the potential for financial institutions to develop responsible strategies to serve the subprime market, potentially through products like secured credit cards that help borrowers build credit while mitigating risk for lenders.

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