Sponsored post: The History of Payday Loans

Even with the UK economy statistically in recovery, you can barely open a newspaper or watch a news bulletin without seeing a story about payday loans. It's a term that has entered our post-2008 lexicon, alongside 'triple-dip', 'food banks' and 'quantitative easing'.

The History of Payday Loans

Even with the UK economy statistically in recovery, you can barely open a newspaper or watch a news bulletin without seeing a story about payday loans. It's a term that has entered our post-2008 lexicon, alongside 'triple-dip', 'food banks' and 'quantitative easing'. And it's not surprising that the media, political parties, and even the church, have felt the need to comment: it's estimated that over 8.2 million payday loans were taken out in the UK between 2011 and 2012, with around two million people regularly using them to get through the month. Payday lending has gone from being a £100 million industry, to one that's worth £2 billion, in the space of ten short years.

 

However you feel about using a payday loan, it's clear that demand – some might say need – is still increasing, and that for many people, payday lenders have become an essential part of everyday life in 2014. But what's the background to this explosion? Where did the industry come from and how did it develop? The responsible short-term lender MYJAR, traces the rise of the payday loan below.

 

A centuries-old industry

The concept of short-term lending is far from new – it really is centuries old. Much of its more organised origins can be traced back to the US in the late 1800s, where it was common for workers to take out loans before they received their wages. These were the days when most people found it difficult to get bank accounts and overdrafts were almost unheard of. Alongside pawnbroking and cheque cashing, short-term loans were vital in helping millions of blue-collar workers stay afloat in harsh times.

 

Of course, the practice was not without its controversies. Illegal and unlicensed, although tolerated by the authorities, lenders would collect their repayments however they wished, leading to a noted 1935 incident in New York, when a young clerk was badly beaten for failing to pay his debt. Sparking a series of investigations led by New York Governor and presidential candidate, Thomas E. Dewey, 27 individuals were arrested for the violent collection of repayments, meaning that the practice was firmly on the authorities' radar, and well on the way to becoming a regulated industry.

 

The 1900s: The legal fight

Through the 1940s and 1950s, many US states imposed strict laws on interest rates in an attempt to curb the lending industry, but this rapidly had a negative impact. With cities such as New York and Chicago capping rates at 6%, the market quickly became almost entirely illegal once more. A landmark legal case finally changed the status quo in 1978.

 

The Marquette National Bank of Minneapolis v First of Omaha Service Corp case, resulted in a Supreme Court decision which overturned the enforcement of Minnesota's anti-usury laws against nationally-chartered banks in other states. Essentially this allowed chartered banks to charge their home-state interest rates across the US. With short-term lenders increasingly partnering with banks and rebranding their product as high-interest 'bank loans', many saw the opportunity to start setting up legitimate businesses in states where the anti-usury laws were relatively relaxed.

 

The 1990s: Exporting to the UK

Although payday lending was an industry largely born in the US, lenders saw opportunities to expand overseas. By the early 1990s, large parts of the industry had exported their product to the UK, most notably The Money Shop, which opened its first UK shop in 1992, slowly expanding its estate to 273 by 2009, even before the effects of the credit crunch were being keenly felt in people's pockets. It's interesting that the payday lending market in the UK is still dominated by large US businesses, with five of the seven largest UK payday lenders controlled by US companies.

 

2008 onwards: The rise and rise

Of course, once the recession in the UK really began to bite, the industry grew significantly, increasing to £1.7 billion in 2010. As banks and credit card companies, traditionally the source of retail credit, tightened their lending criteria, leaving many customers without access to money when they needed it.  This in turn led to an advertising bonanza and a battle for hearts and minds. The average adult in the UK is said to have watched 152 payday loan TV adverts in 2012, and we can only assume the number grew last year. Although the market is clearly considerable, and has caused much moral handwringing, many commentators point to the fact that the sector's lending of around £2bn is still dwarfed by that of the credit card industry, which stands at around £55 billion.

 

The future?

As it stands, it seems that payday loans are here to stay. Even with the economy slowly stabilising, the history of the payday lending industry shows that it often fills a void for people who don't have access to mainstream sources of credit. With banks remaining reticent to help people unless they have a gold-plated credit score, and wages still struggling to keep in line with inflation, it's easy to understand that payday loans will continue to be a viable and realistic option for many.

 

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A year on from the Spending Review, the coalition's soothsayer has emerged to offer another gloomy economic prognosis. Asked by ITV News whether he could promise that there wouldn't be a double-dip recession, Vince Cable replied: "I can't do that.

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What do Labour's lost voters make of the Labour leadership candidates?

What does Newsnight's focus group make of the Labour leadership candidates?

Tonight on Newsnight, an IpsosMori focus group of former Labour voters talks about the four Labour leadership candidates. What did they make of the four candidates?

On Andy Burnham:

“He’s the old guard, with Yvette Cooper”

“It’s the same message they were trying to portray right up to the election”​

“I thought that he acknowledged the fact that they didn’t say sorry during the time of the election, and how can you expect people to vote for you when you’re not actually acknowledging that you were part of the problem”​

“Strongish leader, and at least he’s acknowledging and saying let’s move on from here as opposed to wishy washy”

“I was surprised how long he’d been in politics if he was talking about Tony Blair years – he doesn’t look old enough”

On Jeremy Corbyn:

"“He’s the older guy with the grey hair who’s got all the policies straight out of the sixties and is a bit of a hippy as well is what he comes across as” 

“I agree with most of what he said, I must admit, but I don’t think as a country we can afford his principles”

“He was just going to be the opposite of Conservatives, but there might be policies on the Conservative side that, y’know, might be good policies”

“I’ve heard in the paper he’s the favourite to win the Labour leadership. Well, if that was him, then I won’t be voting for Labour, put it that way”

“I think he’s a very good politician but he’s unelectable as a Prime Minister”

On Yvette Cooper

“She sounds quite positive doesn’t she – for families and their everyday issues”

“Bedroom tax, working tax credits, mainly mum things as well”

“We had Margaret Thatcher obviously years ago, and then I’ve always thought about it being a man, I wanted a man, thinking they were stronger…  she was very strong and decisive as well”

“She was very clear – more so than the other guy [Burnham]”

“I think she’s trying to play down her economics background to sort of distance herself from her husband… I think she’s dumbing herself down”

On Liz Kendall

“None of it came from the heart”

“She just sounds like someone’s told her to say something, it’s not coming from the heart, she needs passion”

“Rather than saying what she’s going to do, she’s attacking”

“She reminded me of a headteacher when she was standing there, and she was quite boring. She just didn’t seem to have any sort of personality, and you can’t imagine her being a leader of a party”

“With Liz Kendall and Andy Burnham there’s a lot of rhetoric but there doesn’t seem to be a lot of direction behind what they’re saying. There seems to be a lot of words but no action.”

And, finally, a piece of advice for all four candidates, should they win the leadership election:

“Get down on your hands and knees and start praying”

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.