Payday loans have been around for centuries

The payday loan industry has been in the news quite a bit lately.  While the issue is not exactly Roe v. Wade, it is a polarizing issue, with many in the media and consumer action groups choosing on which side of the fence to be.

Today, anyone with a job can get a short-term loan from a storefront operation in almost any neighborhood, in states where the business is legal, of course.  The borrower writes a postdated check for the amount he needs to borrow, plus the fee, and walks out with the cash he needs.  Usually there is no credit check, so the borrower need not worry about credit scores.

The internet is also a rich source of short-term loans.  A number of websites have popped up, offering loans up to $1500.  The borrower fills out an application and is approved or declined within a few minutes.  The lender transfers the money to the borrower’s bank account, and then does a withdrawal from the same account on the agreed-upon date.  It’s all very anonymous and convenient.

Most think that the payday loan industry just “started” in the mid-1990s when so many storefront businesses sprouted up all over the country.  There is also the misconception that it is an American phenomenon, but the practice is actually worldwide, and is especially prevalent in the UK and Asian countries.

The beginnings and the evolution

There are many references in historical documents which refer to the practice of lending, many of which pre-date any references to banks.  The Romans provide many stories concerning the practice, and one can only imagine that some thrifty Roman soldier was developed a profitable business loaning money to other members of the legions.

The evolution of the payday loan industry dates back to the pre-Industrial Revolution era.  In remote areas where new industry was springing up, banks and money were in short supply.  Rather than U.S. currency, many companies would pay their workers in “scrip,” which is company-printed currency they could use in the company store for goods and services.  These were often sold at artificially high prices, further benefitting the company.  This practice fell under the scrutiny and was eventually abolished by the Federal government.

Many companies also owned the housing that went up around burgeoning industrial areas, and in addition to the company store, also rented housing to their employees.  This, in effect, set up an artificial bartering system whereby the employee was trading his labor for goods and services.  The coal and oil companies were especially adept at this practice, but it died out, for the most part, in the first half of the 1900s.

The next step in the evolution was the company offering employees credit to buy food, clothing and other necessities on credit, with the value of those goods taken out of his pay at the end of the week.  The goods were often sold at over-inflated prices, and the employee could often find himself in debt to the company.  Think about the lyrics in the song “16 Tons” and how the man tells St. Peter at the Pearly Gates that he can’t get into Heaven because he “owes his soul to the company store.”  When the banking industry became involved in regulation, companies that did not wish to become regulated as banks abandoned the practice.

The rise of the storefront and the mob

The first payday loan businesses came about in the 1930s in the big cities on the eastern seaboard.  Most were single-owner neighborhood businesses which offered loans to people who could not, or would not, do business with a bank.  Many people had steady jobs, but weren’t paid very well, which sometimes made it necessary for a short-term loan when a crisis hit.  For these workers, many of them immigrants with no way to get a loan from a bank, the lender became his bank.

Because many of these Mom & Pop businesses sprung up in metropolitan areas where mob influences are common, they became targets for extortion.  Eventually, the mob took over the practice of lending, when it became apparent to them that they would make more money on interest rather than just getting a piece of the action.  Often times, the thugs made it impossible for the borrower to re-pay the debt, adding fees for the most trivial of infractions.  They used beatings, or more likely, the fear of beatings, to coerce the borrower into paying them.

The Industry Today

Today, critics are quick to draw the correlation of the industry to the mob lender with his thumb on the little guy.  They paint a picture of unsavory characters who loan money to people and make it impossible for them to pay back.  They use terms like “predatory lending” to make their case.

Recently, the rise of Internet lenders like LoanPointUSA has been the trend in the short-term loan industry.  The payday loan industry employs thousands of people across the country and provides financial resources to many who would not otherwise have it.  The mid-1990s saw a boom in the number of storefront businesses, with many cropping up in socio-economically depressed areas.  Many are corporate businesses with locations across the country.  The Internet lenders such as LoanPointUSA have become IT gurus, with proprietary software and teams of customer service people helping customers.

They typical borrower is a white female, with a checking account and usually at least one major credit card.  She has graduated from high school, has some college education, and makes just under $40,000 a year.  Usually the loan is used for emergencies, and is seen as an alternative to facing inconvenient utility shut-offs and the reconnection fees that go with it, or the much more expensive bounced check fees.

For those customers in need, of a quick loan, a payday loan is a viable resource when they need it.  When used responsibly, a loan can help a person stay on his feet financially, rather than spiraling ever-downward.