The History of Payday Loans
Even with the UK economy statistically in recovery, you can barely open a newspaper or watch a news bulletin without seeing a story about payday loans. It’s a term that has entered our post-2008 lexicon, alongside ‘triple-dip’, ‘food banks’ and ‘quantitative easing’. And it’s not surprising that the media, political parties, and even the church, have felt the need to comment: it’s estimated that over 8.2 million payday loans were taken out in the UK between 2011 and 2012, with around two million people regularly using them to get through the month. Payday lending has gone from being a £100 million industry, to one that’s worth £2 billion, in the space of ten short years.
However you feel about using a payday loan, it’s clear that demand – some might say need – is still increasing, and that for many people, payday lenders have become an essential part of everyday life in 2014. But what’s the background to this explosion? Where did the industry come from and how did it develop? The responsible short-term lender MYJAR, traces the rise of the payday loan below.
A centuries-old industry
The concept of short-term lending is far from new – it really is centuries old. Much of its more organised origins can be traced back to the US in the late 1800s, where it was common for workers to take out loans before they received their wages. These were the days when most people found it difficult to get bank accounts and overdrafts were almost unheard of. Alongside pawnbroking and cheque cashing, short-term loans were vital in helping millions of blue-collar workers stay afloat in harsh times.
Of course, the practice was not without its controversies. Illegal and unlicensed, although tolerated by the authorities, lenders would collect their repayments however they wished, leading to a noted 1935 incident in New York, when a young clerk was badly beaten for failing to pay his debt. Sparking a series of investigations led by New York Governor and presidential candidate, Thomas E. Dewey, 27 individuals were arrested for the violent collection of repayments, meaning that the practice was firmly on the authorities’ radar, and well on the way to becoming a regulated industry.
The 1900s: The legal fight
Through the 1940s and 1950s, many US states imposed strict laws on interest rates in an attempt to curb the lending industry, but this rapidly had a negative impact. With cities such as New York and Chicago capping rates at 6%, the market quickly became almost entirely illegal once more. A landmark legal case finally changed the status quo in 1978.
The Marquette National Bank of Minneapolis v First of Omaha Service Corp case, resulted in a Supreme Court decision which overturned the enforcement of Minnesota’s anti-usury laws against nationally-chartered banks in other states. Essentially this allowed chartered banks to charge their home-state interest rates across the US. With short-term lenders increasingly partnering with banks and rebranding their product as high-interest ‘bank loans’, many saw the opportunity to start setting up legitimate businesses in states where the anti-usury laws were relatively relaxed.
The 1990s: Exporting to the UK
Although payday lending was an industry largely born in the US, lenders saw opportunities to expand overseas. By the early 1990s, large parts of the industry had exported their product to the UK, most notably The Money Shop, which opened its first UK shop in 1992, slowly expanding its estate to 273 by 2009, even before the effects of the credit crunch were being keenly felt in people’s pockets. It’s interesting that the payday lending market in the UK is still dominated by large US businesses, with five of the seven largest UK payday lenders controlled by US companies.
2008 onwards: The rise and rise
Of course, once the recession in the UK really began to bite, the industry grew significantly, increasing to £1.7 billion in 2010. As banks and credit card companies, traditionally the source of retail credit, tightened their lending criteria, leaving many customers without access to money when they needed it. This in turn led to an advertising bonanza and a battle for hearts and minds. The average adult in the UK is said to have watched 152 payday loan TV adverts in 2012, and we can only assume the number grew last year. Although the market is clearly considerable, and has caused much moral handwringing, many commentators point to the fact that the sector’s lending of around £2bn is still dwarfed by that of the credit card industry, which stands at around £55 billion.
The future?
As it stands, it seems that payday loans are here to stay. Even with the economy slowly stabilising, the history of the payday lending industry shows that it often fills a void for people who don’t have access to mainstream sources of credit. With banks remaining reticent to help people unless they have a gold-plated credit score, and wages still struggling to keep in line with inflation, it’s easy to understand that payday loans will continue to be a viable and realistic option for many.
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