Payday loans is a controversial form of short-term loans, providing small amounts of money with a high annual percentage rate of charge (APR). The payday loan is to be repaid in a single payment on the borrower’s next payday, usually 2-4 weeks later.
Why take a Payday loan?
Since the APR for payday loans is so high, you may be wondering why would anyone want to get a payday loan. Well, payday loans are intended to cover short term emergencies or situations in which banks are unwilling to lend money (due to bad credit, for instance), and as such they can be an excellent financial option, a life-saver even.
Indeed, with some companies offering payday loans, bad credit is not an issue. Usually all that’s needed is some proof of employment or income.
For example, your car suddenly breaks down. You need $500 to repair it, but will not have the money until you get your next paycheck in 2 weeks. That’s where an online payday lender comes in handy. They lend you the money, you’re able to fix your car (and keep commuting to work), and you repay them when you get your salary. The downside that beyond the $500, you have to add a hefty amount of money to cover the interest and fees.
Where do payday loans come from? How how have they changed throughout the years?
A Brief History of Payday Loans in the United States
The earliest documented payday loan appeared in the late 19th century, when employers used to delay wage payments before regular scheduled paychecks were issued. Many people needed the money immediately and thus the employers gave employees the option to get their own paycheck earlier for a fee which had to be paid when the next paycheck was given. This practice was known as “salary buying.”
Then, the 1920s, “loan sharks” appeared, lenders who provided short-term loans with very high interest rates of up to 1,000%. And they were often unfair toward their clients, often using violence to force lenders to repay.
Eventually, non-commercial organizations stepped in, which resulted in legislation which allowed licensed lenders to charge much higher interest rates if only they would adhere to strict supervision and regulations. By the 1940s, most states have adopted the law.
By the second half of the 20th century, the first payday loans appeared (and were at first known as “check cashing services”). In the beginning, they were provided in physical locations, and later online.
Payday Loan Regulation
In 1968, the Truth In Lending Act was passed federally to promote the informed use of consumer credit by requiring disclosures about terms and cost. This allowed consumers to compare different loan providers and find out which offer the best terms.
In 1974, the Equal Credit Opportunity Act was passed, making it illegal for creditors to discriminate against any applicant on the basis of race, color, religion, national origin, sex, marital status, or age. This forced payday loan providers to offer the same terms to all borrowers.
Payday loans as we know them today appeared in the early 1980s when a deregulation of interest rates was initiated by the Depository Institutions Deregulation and Monetary Control Act of 1980. This allowed lenders to charge any loan interest rates they chose.
Nowadays, many US states have APR caps and even bans on some forms of lending. The dangerous snowball effect of rolling over short-term payday loans, for example, is prevented in some states by prohibiting lenders from issuing a new loan to people who have been in debt for a long time, and there are limited on the monthly payday loan installment payments relative to the borrower’s gross monthly income.
In 2011 the Consumer Financial Protection Bureau (CFPB) was established to provide consumers with financial education as well as to take action against predatory lending companies. In 2017 a rule was set requiring the majority of a loan balance, be repaid at once with the objective of eliminating “payday debt traps.”
Additional regulations were established in 2017, limiting the number of payday (and other types of) loans that can be made to a single borrower and preventing payday lender from repossess lenders’ vehicles, which would inhibit a borrower’s ability to drive to work so they can pay back their debt. Moreover, the CFPB requires a that lenders make sure borrowers can afford to pay back the loan, and also limits the quantity of loans taken to only 3.
How to choose a good Payday Loan Provider?
Nowadays, it is a lot safer to take a payday loan due to regulations on both the federal and state levels. Still, you should do your research and choose responsibly. Always compare different payday loan providers before deciding on a company to lend from.