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The Origin of Payday Loans

Payday Loans. People also use the term legal loan-sharking. Others use it as a useful alternative for unforeseen monetary emergencies. Others consider it both a blessing and curse.

Modern day payday loans began in the late 19th century with the so-called “$5 for $6 boys” considered as the original loan sharks. The Uniform Small Loan Law was passed in the 1940’s half a century since its initial appearance. It was primarily passed in order to oust loan sharks out of business by making it profitable for regular businesses to grant small loans to individuals. With its inception, an annual cap of 36 percent was placed on small loans, a rate much higher than general usury rates. In exchange for regulating their business, lenders charged these rates. The 1960’s and 1970’s saw many of these lenders drop small loans, seeing more future, switched to auto finance, business loans and home equity.

In many communities, Bank branches soon disappeared. Alternative financial services took shape due to the shortage of mainstream financial institutions. To date, the AFS provides banking services for low-income and working poor consumers, residents of minority neighborhoods, and those with blemished credit histories. Soon, there was a rise in storefront retailers that began to pawn items, and provide payday advance loans, auto title loans, and refund anticipation loans. These loans were short-term but high-cost.
Between 1996 and 2001, there was a steady rise in check-cashing services. It was payday lending, however, that saw a phenomenal growth nationwide. Other countries followed soon.

According to scholar John Caskey, The popularity of payday lending in the U.S. can be attributed to three complementary factors : 1) the prevalence of direct deposit and electronic delivery of public benefits; 2) state laws allowing the charging of fees; 3) high demand fueled by a growing increase of people with impaired credit.

The “anything goes” attitude of people during the early 1980s was a very crucial factor that paved the way for the rise of payday lending. At some point in the 20th century, people developed the so-called Theology of the Marketplace. At this stage, usury laws became irrelevant.

To this day, payday lending happens everyday for millions of Americans. It is a valuable tool for people who have very few alternatives in the mainstream financial institution. Critics say that people are being exploited. Whatever circumstances these loans offer, the debt is going to be overwhelming.

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