The Long Evolution of the Payday Loan

A History of Payday Loan Reforms

Since storming into our consciousness in the early 2000s, the payday loan sector has been through a bumpy ride, so much so that ‘payday loans’ no longer really exist. Online lenders like Wonga, one of the names most associated with this type of loan, have moved away from these super short-term loans and now provide installment loans under newer, more sustainable conditions.   

However, the arrival of online payday lenders at the turn of the 21st century was certainly not the first incarnation of short-term lenders. In fact, the very first example of this business model in practice can be traced all the way back to the 5th century. 

Hawala: the first payday loans

Based on a principle of trust, Hawala was a method of providing short-term loans that first emerged in North Africa and the Middle East between 401 and 500 AD. Given that fast travel was not possible, money would be loaned from one person to the other through a series of brokers, allowing cash to be exchanged between borrowers and lenders in different geographic locations. 

Temples and the introduction of modern banking

These days, short-term loans can be made directly from the borrower to the lender, but until fairly recently, the whole system relied on the banks. The first idea least of a bank as we know it arose in the 10th century. 

In early civilisations, there was no safe place for people’s valuables, such as gold and other precious metals, which made them very easy to steal. To overcome this threat, the rich began to keep their valuables in temples, which were always attended and had a sanctity and religious importance that helped to deter thieves. 

In the 18th century, the role of the temples developed, with records of loans being made by the priests in the temples in the first example of modern banking.   

The development of the banking system

It’s only since the 1920s that we have seen an organised banking system. Initially, it was only used by the wealthy and it was almost impossible to borrow money. By the 1950s, bank loans were still out of the reach of normal people. Instead, they would turn to pawnbrokers, who would provide short-term loans but request a valuable item, like a watch or piece of jewellery, as security. 

Cheque cashing came along in the 1970s, which was the first real example of a payday loan in practice. People could visit a cheque-cashing store and provide them with a post-dated cheque. They could leave with the cash, minus interest and fees, and the cheque would not be cashed until the date on the cheque, which was often payday. 

Online payday lending

The advent of the internet brought an explosion of short-term lenders in the early 2000s, with unsecured borrowing now readily available with very few checks. Buying on credit was considered the norm and people felt relaxed about borrowing money. 

Online payday loans capitalised on this appetite for easy cash by being fast and convenient, with borrowers able to apply for loans from the comfort of their own homes. If their applications were approved, they’d be able to access the cash sometimes in less than an hour. 

Regulation of the industry

The explosion of online payday lending brought widespread overuse and an overreliance on short-term loans. The industry grew rapidly and initially went largely unchecked, with borrowers providing loans without conducting affordability assessments, while high levels of interest and excessive fees were commonplace.

In 2015, the UK finance regulator the Financial Conduct Authority (FCA) introduced regulations that changed the shape of the industry. It capped interest rates, default charges and the total cost of loans, which forced many of the less unscrupulous lenders out of the market.

As the unscrupulous lenders receded, more responsible lenders took their place. Now, there are fewer but more sustainable lenders that are closely regulated and more focused on delivering value for the customer and serving them in a sustainable and transparent way.