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History Of Payday Loans

If you’ve ever heard of payday loans, chances are they’re not something you’d want to use. But if you haven’t, here’s a quick rundown on what exactly these short-term loans are and why people use them. 

The term “payday loan” was coined in the early 1990s, in response to the rise in credit card debt among Americans. The idea behind it is that if you have money coming in from your paycheck every two weeks, then you can borrow against it for an emergency need, like paying an unexpected bill or buying food while you’re out of work. This allows people who might otherwise be unable to pay their bills to get by until their next paycheck arrives. In fact, this is one of the only types of credit available without having to provide any collateral — which means the loans don’t require you to put up anything as security, but instead take advantage of the fact that you’ll likely receive your next paycheck no matter what happens. 

The problem with these loans, though, is that they tend to carry higher interest rates than other forms of credit, and often come with a lot of fees attached. That’s because they’re designed specifically for emergencies and typically allow borrowers to take out twice as much money as they would be able to under normal circumstances (for example, if a person needs $1,000 as opposed to $500). As such, they’re considered high-risk ventures. People with bad credit also tend to gravitate towards payday loans, since they offer them at a lower interest rate than other options. 

But despite those downsides, there are people who absolutely cannot live without them. Why? Well, first off, because of the nature of loans themselves. They’re short-term, meaning that they last anywhere from three months to six months. After that, you need to repay them in full. 

That said, many people don’t see themselves using payday loans, let alone needing them after all the time they’ve spent thinking about how to avoid getting into debt in the first place. Some people, however, have been forced into using them due to unforeseen events, and some of them even find themselves falling back into them over and over again. Here’s a look at just some of the reasons why. 

A Little History Of Payday Loans 

People have used payday loans since the beginning of time. Ancient cultures would often lend money to people who needed it when they had extra cash lying around, and so would medieval communities. It wasn’t until the mid-20th century that the concept of borrowing money against future income was formalized and made widespread, thanks in part to the introduction of check cashing stores in the 1940s. In a sense, these were predecessors to modern payday lenders. 

It wasn’t until the late 1970s, when the first payday lender opened its doors, that the industry really took off. By then, it had largely become an option for low-income individuals, especially those living in rural areas. These loans, which were usually only available through small storefront operations, helped give people a way to access funds when they didn’t have enough cash to cover their expenses. 

By the 1980s, the industry had grown considerably, with more than 40 million people taking out loans each year. Then, in 1991, lawmakers passed legislation that limited the amount that could be borrowed per week to $400, and capped the total amount that could be taken out at $2,000 per month. A few years later, states began passing laws that effectively banned payday lending outright. Those laws included limits on the number of times a borrower could take out a loan, and the interest rates that could be charged. 

Despite those setbacks, the payday lending industry continued to grow. One reason for this has been the rise of online payday lenders. While they may not be quite as prevalent as the storefront variety, they still exist, allowing people to get payday loans without leaving home. 

Why Do People Use Them? 

There are many reasons why someone would want to take out a payday loan rather than another type of credit. For starters, they’re easy. All it takes is a signature on a piece of paper, and you can be on your way. The process is fast and straightforward, so it doesn’t take long for you to get approved. And unlike banks, payday lenders won’t ask you to prove that you actually have a job. 

Another big perk of payday loans is that the repayment terms are flexible. Unlike credit cards or other forms of revolving debt, you don’t have to pay them off in full every single month. Instead, you can make payments over several months or even a year, depending on the amount you borrowed. The flexibility allows you to pay down your balance each month, and then take out a new payday loan once your current one is paid off. 

And although most people think of payday loans as being reserved for emergency situations, there are a surprising number of people who use them to pay for things like car repairs and groceries. According to the Federal Deposit Insurance Corporation, nearly half of all payday loan customers use them for nonemergency purposes. 

While these loans have plenty of benefits, there are also drawbacks. For starters, they’re expensive. Even before interest charges are added to the equation, payday loans can cost between $25 and $50 for every dollar you borrow. That adds up quickly, and can result in thousands of dollars in debt if you keep taking out new ones. 

Even if you do manage to pay down your loan, you’ll soon need to start paying back the interest charges. With most payday loans, you can only borrow a certain amount of money, but the interest will continue to accrue until the entire balance is repaid. So if you borrow $300 and pay off $200, you’ll end up owing $250 in interest charges, even if you never touched the remaining balance. 

One final downside is that payday loans aren’t always covered by insurance. If you lose your job and can’t pay back your loan on time, you could end up losing your house, car, and life savings. In fact, according to the Consumer Financial Protection Bureau, at least 1 in 4 payday loan customers ends up filing for bankruptcy due to his or her inability to pay back the loan. 

What Can You Do About It? 

If you’re reading this article hoping to learn ways to stop getting payday loans in the future, know that there’s unfortunately nothing you can do about it now. And yes, you probably should not take out a payday loan in the first place. If you need to borrow money for an emergency, try looking for a local nonprofit organization that offers financial assistance. Or, if you’re desperate, you might consider applying for a personal loan from a bank. 

If you’re already working with a company that can help you manage your debts, you might want to talk to your financial advisor about whether payday loans are a good fit for your budget. The point is, there are better alternatives to payday loans, but if you can’t afford to pay back your debt right now, you might have no choice.

Conclusion

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Kris
Kris is our in-house writer with a lot of experience under her belt. She loves to provide her insight about the market trends and her predictions about market trends are often on point.