Payday loans may seem like they’re a very new concept, but they’re actually just the latest version of ideas that have been around for a long time.
There have always been two basic types of loans – those that are for the short-term and paid back quickly, and those that are for the long term with a much longer repayment plan. The shorter-term loans have always been more immediately expensive, while the longer term loans usually cost more overall, but less per month.
The longest-running version of this kind of lending involves those looking for money providing basic collateral in return for the loan. This would involve giving over a possession (or possessions) of some worth. The lender would then give the borrower a proportion of the worth of the possession.
The amount wouldn’t usually be for the entire worth of the possession and the lender would have to pay interest on top of the loan. If the borrower was unable to repay the loan, then the lender was entitled to put the possession on sale.
These pawnbroker shops were popular and still exist now. They can usually be recognised by the signs that they’ve traditionally hung from the wall – three spheres suspended from a bar. This refers back to the origins of pawnbroking in Italy. It was originally called ‘Lombard banking’ after the region it was created in.
The ability to guarantee payments meant that pawnbrokers were challenged by a new high-street store in the 20th century – the Cheque Cashing stores. In fact, many pawnbrokers adapted and also became cheque cashing stores.
Cheques could be guaranteed by banks (usually with a guarantee card) for a certain amount. For most, it was around £100. When a borrower went to a cheque cashing company, he would make a number of cheques out to the company, which would be post-dated. Each cheque would be for the guaranteed amount up to the amount that the card would guarantee.
The borrower would be given a percentage of the cheque amount – for example, they would be given £80 per £100 cheque. Then, once the date was ready for the cheque to be cashed, the company would cash it, and the borrower wouldn’t have to pay any more. The extra amount covered the interest.
These became very popular for a while and do still exist today. However, the rise of online payday loans became a serious competitor.
Online payday loans
With the rise of online credit checks and internet banking, online applications for short-term credit became viable for the first time. The speed with which cash could be put into applicants accounts meant that they could compete with the high street shops for the first time.
This had an added bonus for many customers – going into high street shops did not always feel discreet, however applying from the comfort of their own home was potentially a bonus.
The same basic model applies with payday loans as with the above, just without the collateral or the guarantee, but with more information about the customer. When it’s traced back, it can appear as if payday loans and the like came out of nowhere, but they’re actually part of a long tradition.