History of Payday Loans

The 5th Century

Between 401 and 500 AD, in North Africa and the Middle East, the concept of 'Hawala' was born. Based on trust principles, Hawala was a method of providing fast loans from person to person.

Person 1 would lend money to Person 4. This money would not travel directly. Instead:

  • Person 1 would give their money to Person 2.
  • 3 would give their own money to Person 4.
  • Person 3 would then get paid by 2, at a later date, using Person 1's money.
  • 1 has then indirectly provided money to Person 4.

For fast loans, the Hawala system is exceptionally efficient.

The 1920s

It's fair to say that banking systems have evolved over the centuries. Over time, banks closer to those that we recognise today were set up to formalise this service.

Only since the 1920s, following World War One, have banks been more prevalent. In the early days, banks were only available to the wealthiest and well connected. References, along with documents to show evidence of creditworthiness. Would need to get provided just to open an account. It was almost impossible to borrow money in the 1920s. Where only the wealthiest could expect to take out a loan.

1930s to 1950s

Bank loans were not accessible for the majority of people. People would often turn to pawnbrokers when they needed financial help.

Borrowers would use pawnbrokers for secured loans. Providing a valuable item (such as jewellery) in exchange for the money that they needed.

Much like modern day payday loans. The loans provided by pawnbrokers were often given on short terms. They were also for relatively small amounts of money.

Borrowers had to pay back their original loan. Plus interest, before the deadline for their loan ran out.

If a pawnbroker did not receive their repayments on time, they would sell the borrower's valuable item to get their money back.

Pawnbrokers still exist today but they are not quite as popular as they once were.

Using a pawnbroker is often the last resort after payday loans and other credit options have been exhausted.

Cashing Cheques in the 1970s

Following the success of pawnbrokers in the early to mid-1900s, cheque-cashing stores became a common sight on the high street and worked in much the same way as modern payday loans.

Consumers could visit a cheque-cashing store. Providing a signed and post-dated cheque in exchange for the cash (which would be minus service fees and interest).

Borrowers could receive money when they needed it. With the lender cashing the cheque as soon as it became valid. The borrower did not need to return to pay off their debt. As the money would automatically get taken when the cheque got cashed.

Most borrowers would post-date their cheques so that the money would get taken after their next payday. Making these cheque-cashing services the original payday loans.

If a borrower wanted a larger loan many cheques would get written so that the guarantee covered each.

A guaranteed cheque was a more secure offer from a borrower.

Cheque cashing stores became popular superseding pawnbrokers as the main source of quick cash loans. In fact, many pawnbrokers expanded to offer this service.

Whilst cheque cashing still exists to this day, payday loans provide the same service in a much more accessible way as cheques are rarely used in financial transactions.

Banking system changes - The 1980s

Thatcher's government relaxed the banking restrictions and almost overnight people that were unable to sign up for a bank account could open an account in their name.

Borrowing was also easier. More people were able to take out loans and mortgages. Buying their own homes and using borrowed money for their purchases.

It did not take long for people to become accustomed to borrowing money. Some overspent. Because they had credit options available. Whilst others were able to live, rather than just survive, for the first time. Despite this, getting a loan in the traditional way could still be a challenge for many.

Payday lending - the 1990s and 2000s

With unsecured credit becoming increasingly available, but still not meeting every need. Payday loans came into existence.

These were particularly appealing to those that struggled to get a traditional loan from the bank.

Already in the habit of spending many people found it easy to convince themselves to borrow from payday lenders.

Buying on credit was now considered the norm, which meant that people felt relaxed about borrowing.

Whilst people in the 1920s had found it almost impossible to take out a loan, or even set up a bank account, the 1990s and 2000s were very different.

Payday loan companies now provided consumers with incredibly easy options. And processes with which to get desired funds.

The World Wide Web made borrowing even easier. With safe online applications making short-term credit a viable option for many.

Cash could get sent to a bank account in a short space of time. Often minutes. Which meant that online lenders could now compete with established high street locations.

Consumers also enjoyed the privacy of online payday loans, which helped them to be discreet about their borrowing. They could apply from the comfort of their own home, often too easily.

Overuse of payday loans

During this period of industry boom, too many people made use of payday loans. Regulations were not strict enough and loans could get taken out on impulse and the payday loan industry then went largely unchecked. Lenders provided short-term loans without running through affordability assessments. They charged high levels of interest and excessive late payment fees.

Many turned to unscrupulous methods of debt collection when customers couldn't pay back their loans

From 2008-2012, the industry grew quickly. Consumers thought of payday loans as a fast and easy credit option, but often fell into difficulty when it was time to repay their debts.

Although payday loans are intended as a low-value form of credit with lenders typically providing between £100 and £1,000 per loan the average payday loan debt in 2012 stood at £1,200.

Evolution of the payday industry - 2010 to 2019

From 2010 industry growth slowed down as many consumers became less trustful of payday loan.

The risks associated with short-term, high-cost borrowing were more widely understood. And many well-known lenders became well known in the media for all the wrong reasons.

With regulation before 2014 not being effective enough. The newly created FCA (Financial Conduct authority) looked to clean up the industry and began regulation in April 2014.

The Financial Conduct Authority replaced the Office of Fair Trading. Which had regulated since 1973. And the Financial Service Authority that regulated from 1997 until 2013.

FCA review - Payday Loans

Few occasions in the history of payday loans were as big as the FCA's review.

The newly formed FCA to ensure the safety of borrowing reviewed the payday loan industry in detail.

The FCA looked into each lender and loan broker. And checked that they adhered to stricter regulations. Many lenders got refused authorisation because they couldn't meet FCA standards.

There were also many lenders that left the market unwilling or unable to adapt to industry changes.

Lenders that were fully authorised by the FCA got placed on the Financial Services Register; meaning consumers could search for trustworthy companies to borrow from.

This register is important because it now gives consumers a place where they could research lenders and brokers. To ensure they met the highest standards of the FCA and adhered to FCA guidelines.

Introduction of caps by the FCA

In January 2015, the FCA introduced caps to make loans fairer and more affordable. The regulator capped interest rates at 0.8% per day. Default fees got capped at £15.

No borrower, following the FCA's cap introduction, would ever have to pay back more than double their original loan amount.

In 2015, 3.5 million people took out payday loans.

These short-term loans became increasingly popular once again. As consumers learned to trust lenders working under the new FCA regulations