Sunday, August 12, 2012

The Evolution of the Payday Loan Industry

The payday loan industry has been getting a lot of attention recently. Many Americans have only recently learned about these lending agents through television commercials and advertisements, but the industry itself has a substantial history that predates the advent of the TV.

According to a PEW analysis of the history of payday loans, the industry stems from an over hundred year old practice of salary lending, wherein an individual could borrow against his/her salary for substantial interest. While payday loans are similar in this regard, the industry has evolved over the past one hundred years, with government regulations making these businesses more transparent and online availability making these services more accessible.

Unlike salary lending, payday loans are legal in most states. At the turn of the century, borrowing from a salary lender could cost someone his/her reputation, job, and money. Things have certainly come a long way, as these days payday loan lending is now mainstream, legal, and government regulated.

Regulations started early in the 20th century; in 1916, the Uniform Small Loan Law proposed a cap of 3.5 % monthly interest on loans of less than $300. While all the states did not comply with this low interest rate, two-thirds adopted the law with revisions, charging between 18 to 45 % interest on small loans. Regulators hoped to encourage the populace to seek out more reputable, licensed lending establishments, but, despite their efforts, the industry continued to grow.

The influx of consumerism in the middle of the 20th century led to the federal deregulation of lending laws in the 1970 and 80′s. When the federal government eased up on the regulations for mortgage lending, credit cards, and other lending businesses, they essentially made it possible for state licensed payday loan lenders to emerge. Following in the footsteps of the feds, the states began to allow state-licensed lenders to offer high-interest, deferred transactions, wherein a borrower could write a post-dated check to secure a loan--for a cost. And so began the payday loan industry as we know it today.

In the past 30 years, the industry has seen tremendous growth, with expansion beyond onsite independent lenders to big banks and online providers. For instance, earlier this year Wells Fargo Bank began offering payday advances, while many companies have taken to the internet. Online lenders have gained popularity due to the convenience they provide, but many are wary of such providers as they are less regulated than their onsite counterparts.

Undeniably, payday advances are still viewed critically by much of society; the high interest rates and short payback periods make such loans dangerous to many consumers. However, with state level regulations, the industry has gained a lot of credibility. Many states have outlawed payday advances altogether; these are dubbed restrictive states and they have very low reports of loan reliance. In hybrid states, those that allow lending but with more regulations, lower fees, and more transparency, payday advance reliance is significantly less prominent.

Even in permissive states, which have less regulation than their restrictive and hybrid counterparts, payday loan businesses have gained reputability. Many lenders are responsible and transparent, seeking to provide loans with their intended purpose: to help people in times of emergency. When used in this way, these advances can be useful. When abused, however, they can cause a lot of harm to one's credit (financial reputation) and finances, much like their predecessors: salary loans.

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