Payday Loan History
Whether you have ever obtained a payday loan before or not, you have probably heard about this loan option. It is one of the common forms of loans that people can explore whenever they need some quick financial bailouts. However, despite the popularity of a payday loan, only a few individuals know anything about how it came into existence. Continue reading this article to learn about the history of payday loans.
In general, a payday loan refers to a form of small, short-term loan that assists a borrower to get quick cash that can be used to cover their needs until their next paycheck. Notably, this loan is an unsecured borrowing with high-interest rates. The ability to access this loan option depends largely on the credit profile and income of the borrower. Other names of payday loans are cash advance loans, payday advances, payroll loans, and salary loans.
The history of payday went back as far as the 5th century. The idea of “Hawala” was established in the Middle East and North Africa around 401 to 500 AD. This concept was entirely dependent on trust as an individual would offer a quick loan to another person without any collateral. In some cases, the lender and borrower might not be in the same geographic location. Therefore, they would need the services of a loan broker who would help them oversee the transactions. Although Hawala loans were significantly different from the payday loans that we have today, we cannot help but notice the similarities they have. The most notable similarity is that they are both fast loans.
Also, in the 10th century, there were loans involving wealthy people that would keep their properties in the temples. These loads often involved the exchange of items between the person securing the goods and the owner of the properties. Later in the 18th century, the time of Hammurabi also witnessed the exchange of properties in the form of loans in Babylon.
Beginning of Modern Payday Loans
It should be noted that the inability of many borrowers to access the bank for conventional loans contributed significantly to their dependence on the payday loan. The banks were only willing to lend money to influential and wealthy individuals who they felt would be able to pay back the loans.
As a result of these, some borrowers resorted to dealing with pawnbrokers. Notably, the pawnbrokers would give loans to the individuals and collect valuable items as collaterals. Pieces of jewelry were some of the most common collaterals during this period. The collateral would have a higher value than the loan amount. As expected, the borrowers needed to return the borrowed amount as well as interest before the agreed deadline. Failure to do so would make the pawnbrokers sell the collateral to regain their money.
Although payday loans are now accessible in several countries around the world, this modern loan option began in the United States of America. The oldest recorded history of a payday loan was around the late 19th century. It was often referred to as salary buying.
This occurred because the majority of big employers at the time were delaying payments of salary because their scheduled paychecks were not issued on time. However, a lot of the employees could not wait until the paychecks would be issued because they usually had immediate financial needs to attend to. The employees were allowed to pay as much as 10% to 33% of the borrowed amount to have access to a particular part of their paychecks. Also, they had the duty of paying back the full loan once they got their next paycheck.
Unfortunately, the arrangement did not help these employees as they usually had to borrow again because of the expensive repayment plan. They experienced more hardship and would repeat the process, with a higher interest rate.
By 1923, the number of employees depending on salary buying had increased significantly. It had become widespread in the south while many employees in the north were beginning to use it for temporary financial relief. By offering antisocial repayment options and high-interest loans, loan sharks started taking advantage of the situation.
While salary buying continued to provide employees with temporary reliefs, people could not ignore the hardship that it caused during the time. It led to an increase in the poverty level of employees as they could hardly avoid falling back into new debts after paying off the previous ones. As a result of this, the Russell Sage Foundation started research in 1907. The research was designed to study and deal with the societal problem associated with salary buying. According to the findings of the research of the philanthropic group, it was paramount for small-dollar lending to be made affordable so that oppression and fraud can be prevented.
Later in 1909, some non-commercial lenders set up an organization known as The National Federation of Remedial Loan Associations. This organization supported the campaign of the philanthropic group. Later, commercial lenders in the American Association of Small Loan Brokers took a step to join the campaign. As a result of the movement, a new regulation was adopted to deal with this issue. The regulation was known as the Uniform Small Loan Law.
According to the new law, specially-licensed lenders were enabled to acquire as much as 36% interest rates from employees. However, they needed to adhere to the stringent laws and supervision of the organization. Afterward, there were tons of controversial discussions about the suitability of this regulation, with many states refusing to adopt it. Massachusetts was the first state to adopt it in 1911. Nevertheless, by the early 1940s, about two-thirds of the states in the country had adopted the regulation. A few of the states that adopted the law included New Jersey, California, Oregon, Louisiana, Indiana, New York, Colorado, Pennsylvania, Kentucky, New Hampshire, Ohio, Illinois, Georgia, Michigan, and Florida.
Despite the series of revisions and adaptations that the Uniform Small Loan Law went through, it was still unable to protect the employees against massive oppression and fraud. The law continued to allow high-interest rates while the people could not get out of hardships.
Over the next few years, borrowers were still experiencing different challenges with repayment of payday loans. Nonetheless, several attempts were made in the mid-20th century to back the problems associated with this loan option. Finally, the Truth In Lending Act (TILA) was established in 1968 to offer protections to borrowers and force the lenders to offer standardized written disclosures about the terms and costs of the borrowed amounts. Even though the lenders still charged high-interest rates in many states, the lenders needed to show the borrower the terms and costs of the loan before signing the documents. With the Truth In Lending Act (TILA), borrowers can know the cost of their loan before accepting it.
Notably, creditors were discriminating lenders based on their race, sex, class, age, nationality, religion, and color. In other words, a lender could charge a higher interest rate for a particular borrower because of their background or physical characteristics. In 1974, Congress came up with another regulation called the Equal Credit Opportunity Act (ECOA). The Federal Trade Commission started enforcing the law later. With this new regulation, lenders could no more request different interest rates because of the differences in the class of the borrowers. After this regulation, the industry witnessed several other regulations that were targeted at making life easier and more enjoyable for the borrowers.
The Regulation of Payday Loans Today by The Community Financial Services Association of America
The various previous attempts to regulate payday loans were still largely unsuccessful. Nevertheless, the industry witnessed significant growth, and the creditors also structured their businesses better. Short-term lending firms started working together to help employees get immediate financial assistance. Finally, in 1999, the American lenders set up a new organization named the Community Financial Services Association of America (CFSA). This organization was targeted at making sure that its members adhere to the Best Practices.
Today, the organization ensures the creditor offers important financial services to its customers in underserved areas. It focuses on guaranteeing that borrowers can access payday loans without dealing with exorbitant bank charges as well as expensive bank overdraft fees.
Payday Loans around the World Today
The recent increase in its use of payday loans started due to the challenges that borrowers are having with obtaining the traditional loans from banks. Similarly, setting up of payday loan companies is usually easy; hence, lots of them are found in different parts of various countries.
It is worthwhile to note that payday loans have become acceptable in different countries around the world. The United Kingdom, Australia, and Canada offer payday loans. As expected, each country has a particular regulatory body that monitors how borrowers obtain loans from creditors. In the UK, for instance, the Financial Conduct Authority was established in 2013 to handle different financial issues. This agency ensures that borrowers can get more affordable and fairer payday loans.