Payday loans are a popular short-term solution for those who need cash quickly. In-store payday loan businesses began appearing in the United States in the 1980s and quickly became commonplace. But where did they come from? According to Flannery and Samolyk, the payday lending industry originated in the early 1980s as a result of the Depositary Institutions Deregulation and Monetary Control of Institutions Act of 1980. This act annulled all existing state and local usury laws, leading to the elimination of interest rate limits. Before the 1980s, loans of this kind were very rare in the United States.
This is not to say that there were no abusive lenders. Usurers have been around since the Great Depression, and pawn shops have long been a source of last resort for those who are out of work or have had bad luck. Today, payday loans are legal in 27 states, and 9 other states allow some type of short-term lending with restrictions. The typical online loan has a fixed rate of 25-30 pounds sterling for every 100 pounds borrowed, which is much higher than other forms of lending.
Lenders often claim that they do not encourage consumers to take out too many loans (although this is likely due to government pressure and consumer demand). In 14 states and the District of Columbia, interest rates on payday loans are limited to 36 percent, just like for military loans. The Center for Responsible Lending reports that dedicating 25-50 percent of borrowers' paychecks to loan repayment means that most borrowers do not have enough money left over, forcing them to take out new payday loans immediately. Borrowers were eager to take advantage of this opportunity without having to go to a payday loan store. Payday loans are marketed towards low-income households because they cannot get low-interest loans from traditional sources. Several payday lenders have also partnered with Native American tribes, using the same principle.
Depending on your state law, payday loans may be available through physical stores or online. Legislation regarding quick loans varies greatly between countries and states. When payment processors suddenly stopped working with these lenders, many found themselves with multi-million dollar loan portfolios with no way to collect. Instead of reforming their lending practices, many payday lenders simply stopped lending to military borrowers. Despite the availability of revolving credit options, many consumers still prefer more traditional payday loans.
You may have noticed that many payday lenders discourage or even prohibit members of the military and their families from taking out loans.