When did the
history of payday
loans begin?
When did the history of payday loans begin?
You may think that payday loans are a new phenomenon. After all, the industry in its current form was much smaller until fairly recently.
In 2006, only 250,000 people used short term loans.
By 2012, rapid growth meant that the payday loan industry was worth roughly £2.2 billion
Yet, it all started long before 2006.
In fact, to cover the full history of payday loans you would need to go back to the 5th Century.
The 5th Century Between 401 and 500 AD, in North Africa and the Middle East, the concept of ‘Hawala’ was born.
Based on principles of trust, Hawala was a method of providing fast loans from person to person.
Person 1 would lend money to Person 4. This money would not travel directly. Instead:
- Person 1 would give their money to Person 2.
- 3 would give their own money to Person 4
- Person 3 would then get paid by 2, at a later date, using Person 1’s money.
- 1 has then indirectly provided money to Person 4.
For fast loans, the Hawala system is exceptionally efficient.
The borrower and lender can deal in cash without being in the same geographic space. Person 2 and Person 3 act as loan brokers, managing the transaction separately in their own time.
Since the money does not need to go directly from borrower to lender. Person 1 can pass their money to Person 2 and, almost instantly, Person 4 can collect the same funds from Person 3.
The money received by Person 4 in a Hawala agreement is not actually Person 1’s money. Trust is important because Person 3 is giving their money to the borrower. The word ‘Hawala’ itself actually means ‘trust’.
It is crucial that both loan brokers in this four-way transaction can trust one another. Otherwise, the system fails.
Temples in the 10th Century
10th Century temples offered a secure place for wealthy people to store their valuables.
Because valuables were often in the form of precious metals. Such as gold, it also meant it could be easily stolen.
In early civilisations, temples were one of the safest places to store goods as it was a solid building. It was always attended in some way. And the religious importance would deter many criminals from considering an act of crime.
In the 18th century, in Babylon during the time of Hammurabi. There are records of loans getting made by the priests of the temple. Where we can see the early concept of modern banking evolving.
The evolution of the modern banking systems
The 1920s
Banking systems have evolved over the centuries.
Over time, banks closer to those that we recognize today were set up to formalize this service.
Only since the 1920s, following World War One, have banks been more prevalent.
In the early days, banks were only available to the wealthiest and well-connected.
References, along with documents to show evidence of creditworthiness. Would need to get provided just to open an account
It was almost impossible to borrow money in the 1920s. Where only the wealthiest could expect to take out a loan.
Bank loans: 1930s to 1950s
Bank loans were out of reach for the majority of people. They would often turn to pawnbrokers when they needed financial help.
Borrowers would use pawnbrokers for secured loans. Providing a valuable item (such as a piece of jeweler) in exchange for the money that they needed.
Much like modern-day payday loans. The loans provided by pawnbrokers were often given on short terms. They were also for relatively small amounts of money.
Borrowers had to pay back their original loan. Plus, interest, before the deadline for their loan ran out.
If a pawnbroker did not receive their repayments on time, they would sell the borrower’s valuable item to get their money back.
To make a profit if borrowers didn’t repay their debt, pawnbrokers provided loans for smaller loan amounts. Rather than the securing items were worth.
Pawnbrokers still exist today but they are not quite as popular as they once were.
In fact, they are often the last resort after payday loans and other credit options.
Cash Chequing in the 1970s
Following the success of pawnbrokers in the early to mid-1900s, cheque cashing stores became a common sight on the high street.
These worked in much the same way as modern payday loans.
Consumers could visit a cheque cashing store. Providing a signed and post-dated cheque in exchange for the cash. Minus service fees and interest.
Borrowers could receive money when they needed it. With the lender cashing the cheque as soon as it became valid. The borrower did not need to return to pay off their debt. As the money would automatically get taken when the cheque got cashed.
Most borrowers would post-date their cheques. So that the money would get taken after their next payday. Making these cheque cashing services the original payday loans.
Cheque guarantee cards, introduced in 1969, provided reassurance and protection for lenders. Most offered a guarantee of up to £100.
If a borrower wanted a larger loan. Many cheques would get written so that each got covered by the guarantee.
A pawnbroker might not have been able to sell the item that they had got. A guaranteed cheque was a more secure offer from a borrower. Consumers also benefited, because they were providing a piece of paper. Rather than a valuable or sentimental item.
Cheque cashing stores became popular. Overtaking pawnbrokers as the main source of quick cash loans. In fact, many pawnbrokers expanded to offer this service.
Whilst cheque cashing stores still exist to this day, payday loans provide the same service in a much more accessible way. Cheques are rarely still used.
Banking system changes – The 1980s
After decades of strict regulation, the Thatcher government relaxed the banking restrictions. Suddenly, people that were unable to sign up for a bank account could open an account in their name.
Borrowing was also easier. More people were able to take out loans and mortgages. Buying their own homes and using borrowed money for their purchases.
It did not take long for people to become accustomed to borrowing money.
Some overspent. Because they had credit options available. Whilst others were able to live, rather than just survive, for the first time.
Despite this, getting a loan in the traditional way could still be a challenge for many
Payday lending – the 1990s and 2000s
With unsecured credit becoming increasingly available, but still not meeting every need. Payday loans came into existence.
These were particularly appealing to those that struggled to get a traditional loan from the bank.
Already in the habit of spending. Many people found it easy to convince themselves to borrow from payday lenders.
Buying on credit was now considered the norm, which meant that people felt relaxed about borrowing.
Whilst people in the 1920s had found it almost impossible to take out a loan, or even set up a bank account, the 1990s and 2000s were very different.
Payday loan companies now provided consumers with incredibly easy options. And processes with which to get desired funds.
The World Wide Web made borrowing even easier. With safe online applications making short-term credit a viable option for many.
Cash could get sent to a bank account in a short space of time. Often minutes. Which meant that online lenders could now compete with established high street locations.
Consumers also enjoyed the privacy of online payday loans, which helped them to be discreet about their borrowing. They could apply from the comfort of their own home, often too easily.
Evolution of the payday industry – 2010 to 2015
From 2010 industry growth slowed down as many consumers became less trustful of payday loan companies.
Risks associated with short-term, high-cost borrowing were more widely understood. And many well-known lenders became well known in the media for all the wrong reasons.
With regulation before 2014 not being effective enough. The newly created Financial Conduct Authority looked to clean up the industry and began regulation in April 2014.
The Financial Conduct Authority replaced the Office of Fair Trading. Which had regulated since 1973. And the Financial Service Authority which regulated from 1997 until 2013.