When the people of America were suffering financially during the Great Depression of the 1930s, people started to set up their own illegal businesses as loan sharks. There were not many of these lenders, but they existed nonetheless, and took advantage of people who needed extra cash quickly. They would loan money to those in need, and charge extortionate rates of interest (up to 1000%) in order to make large amounts of money for themselves. The borrower would give the lender a check dated in the future for the amount owed, which would be cashed immediately on that date and the money withdrawn from the borrower’s bank account (provided they had the funds available, of course).
Traditional payday loans, however, were not in existence until the 1980s – almost fifty years after the Great Depression ended. While they do charge very high interest rates to customers, they are controlled and regulated in the states where they are legal, which means it’s safer to get a payday loan than it would be to use a modern-day loan shark.
During the 80s and 90s, people with a bit of spare money were starting up their own loan businesses. While regulations against loans started to pop up, there were many ways of getting around the law, and lots of businesses called themselves ‘check cashing’ services or other names which did not suggest they were lending payday loans to customers. The vast majority of these lenders were set up in loan shops around the country, where people would walk in and ask to borrow money if they were in need.
The late 1990s saw the rapid rise of the internet, which brought with it a new way for everybody to communicate. Suddenly, it was no longer necessary for people to walk into a physical store, and lenders could dramatically cut their overhead costs by closing up the shop and operating solely in the online world instead. Rather than simply targeting the local people, lenders could now reach out to thousands of people who were miles away from them.
The internet also made it easy for American lenders to set up websites based in other countries, where there were little or no regulations against payday loans. They could therefore lend money to hundreds of people who had no protection against high interest rates.
Payday loans online also became popular because people were embarrassed to be seen in a loan shop trying to get extra cash. It was also inconvenient for many people, so applying online was a much better option for them.
Nowadays, most people who borrow payday loans are required to pay back $15-$30 in interest for every $100 they have borrowed. However, this only applies if they pay the money back on the date which is specified in their terms and conditions. The problem is that many people cannot repay the money on time, which leads to extra charges and fees over the following months. As this amount increases, it gets more difficult to pay back the money, and in the end, many borrowers spend hundreds of dollars paying back the interest alone.
Thankfully, interest rates have been capped significantly in most of the American states where payday loans are legal. This means that lenders cannot charge high rates of interest that are above the legal APR set out for that particular state. People can also borrow money from lenders in different states which have lower rates of interest, since the interest rates for the loan must be according to the state in which the lender is based, not the state in which the person borrowing the money lives.