The History of Payday Loans
Tuesday, November 17, 2020, 6:00 AM | Leave Comment
The common understanding of a payday loan is a loan that covers an expense which you repay on your next paycheck.
Today, you can have anything from a 2-week paycheck loan or a 3-month payday loan.
But this type of loan came around only in recent decades. Before the 1980s, payday loans weren’t a big thing.
So, how did they start, and where are they headed today?
Payday Loans: Origins
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Initial Practices
The earliest versions of payday loans came around in the 1800s. However, it wasn’t a legitimate form of lending and borrowing at the time. It happened in the informal sector; there was no official authority to oversee the exchanges. People called them ‘salary lenders.’ Lenders would allow people with salaries to borrow a certain sum of money. The condition here would be that they pay back during the agreed period.
Lenders would carefully deal only with people who were most likely to repay the amount. So, it was mostly for people who had a salaried job. -
Payment regulation
There were no financial authorities that regulated these exchanges. So, if a borrower were unable to pay, the lender would take up almost any measure. Some lenders would take the defaulter to court, even though the loan did not come under any legal frameworks. They could also out the defaulter in front of society. Borrowing money (and non-repayment) could carry a lot of social stigma among people at the time. Lenders could make use of this to recover the loaned amounts.
Some lenders would even report the defaulter to their employer. This could mean a suspension or loss of employment for the person. All in all, it was an unorganized form of transaction that happened between individuals.
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Evolution into Modern Payday Loans
Today, payday loans occupy a more accepted role in the financial industry. During the 1980s, the government took some liberal steps towards specific sectors of the economy. One of the main steps was to deregulate private industries, especially financial ones. These regulations allowed banking institutions to set and decide interest rates on loans. In today’s structure, states have the final say in regulating short-term lenders.
So, individual states can set the terms on the following factors:
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Decide the limit on how much money to lend/borrow.
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Make decisions on the types of fees that lenders can charge.
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They can have the final say on these loans’ length and duration.
With a more organized and regulated system, payday loans are changing the way people view short-term loans. So, how will they continue working as we move ahead?
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Payday Loans: The future
Although it started with traditional physical institutions, payday loans are now moving onto online platforms. It’s becoming easier to apply for and get these loans at any time of the day. Normal business hours do not restrict their access like traditional systems.
However, as the online financing options increase, people are also exploring other personal loan options that are available like second chance auto loans. Today we see that crowd-funding, peer-to-peer platforms can bring financing to a much wider audience. The great advantage of online platforms is that it reaches out to borrowers with all types of backgrounds. While this system can increase the risk involved, it also encourages inclusiveness. It even reaches out to those borrowers with bad credit who may be rejected by traditional financing options.
Conclusion
Payday loans have become a convenient and accessible form of short-term financing. Whether you repay in a week’s time or go for a 3-month payday loan, the options are almost endless. With the right information and responsible habits, short-term loans can help you a long way.
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