Is the payday loan a new concept?

Payday loans have becoming increasingly popular over the past few years, which is probably – in part – due to the global financial crisis in 2008. After the crisis struck, banks stopped lending money as much, leaving many people with nowhere to turn to.

Unlike bank loans, customers don't need to have a good credit rating to take out a payday loan, meaning that just about anyone is eligible. Within the last year, the amount borrowed through pay day loans has trebled according to research from Mass1, showing that many workers now depend on payday loans to be able to cover the cost of living.

Payday loans aren't a new concept though – so where did they come from?


According to Mark J. Flannery and Katherine Somolyk – who are respectively from the University of Florida's department of finance, insurance and real estate and the US government's division of research and statistics – the payday loan industry stems from the US in the 1980s but others suggest it originated in the 1800s. Either way, the payday industry came from the US and didn't migrate over to the UK until the 1990s.

Lending in the US stretches back to illegal loan sharks, a far cry from what the payday industry is today, but later on these loan sharks evolved into salary lenders. Needless to say, salary lenders did not adopt the aggressive approach that loan sharks did, but they did charge illegal rates of interest. These lenders were essentially forced to charge illegal rates of interest because interest rates in many US states at that time were so low that lenders had to charge above the average just to stay in business.

This all changed in 1978, when a Supreme Court decision changed the industry completely. Finally, chartered banks were allowed to charge whatever interest rate was permitted in their home state. This meant that many lenders set up shop in states which had relaxed interest rate laws and lent money to those in states where the laws were much tighter. Some payday lenders ended up partnering with banks, meaning their products were renamed 'bank loans' instead.


When payday lenders in the US started to struggle, many moved their brands over to the UK and retail payday shops began appearing in the 1990s. Many companies made the move to the UK due to the relaxed regulations in place, whereas restrictions in the US had gotten tighter. As a result, five out of seven of the biggest payday loan companies in the UK are owned by a US company.

Since the move, the payday loan industry has exploded. Economist Tim Harford states that the industry has gone from seeing total borrowings of