Payday Loans have also been called cash advance, short-term, small-dollar, payroll, salary or payday advance loans. They are small, short unsecured loans. To get them loans, a potential loaner should have employment and payroll records that can be checked.
The regulation of the short-term loan varies from state to state. In 2019, these types of loans are legal in 27 states. 9 states allow these types of loans, but they do put restrictions on them.
In the remaining 14 states and the District of Columbia, they don’t allow it all and have banned the practice. They don’t allow it because it is extremely unfair to the person who gets the loans. People who get this type of loan usually end up declaring bankruptcy. These loans usually automatically rolling over and end up increasing not helping the lenders’ debt problems. They usually make it worse.
Federally, short-term loans are supposed to regulated by the Consumer Financial Protection Bureau (CFPB), regardless of the size of the $300 loan. This bureau was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act during the Obama administration. If a lender is part of the military, they are regulated by the Military Lending Act. This act puts a rate cap of 36% on tax refund loans, payday loans and auto title loans that are made to people that are on active duty in the American armed forces as well as their dependents. This act does not allow certain terms in these types of loans.
Payday people have tried to evade state and federal regulations by taking advantage of the sovereign status of Native American reservations. Essentially, Native American reservations are countries or states onto themselves. They are not part of the federal-state system, and thus, cannot be regulated by the state or federal government. The payday loan people form partnerships with Native Americans or put the business on Native American lands and even if they break the rules, governments can’t go after them because they are not part of the American regulation system. The Federal Trade Commission is still trying to monitor these lending businesses and try to find to punish them if they break the law or regulation.
The possible origin of short-term loans begins in the early 20th century. In the early 20th century, there were lenders that would participate in salary purchases. A salary purchase is when a lender buys a person’s salary for less than the amount that they should be paid. This happens even before the person gets his salary. These salary purchases were earlier versions of payday loans and were done in such a way as to avoid state laws.
Some payday loan companies today started out as places that a person would cash their checks. They started cashing in the 1930s. By the early 1990s, these check cashers started doing short-term loans in states that had looser regulations or were unregulated. They listed themselves in the Yellow Pages in America as Check Cashers.
What also made these type of loans the 1990s was that small community banks started to go bankrupt in the late 1980s. The lack of community banks created a lack of short-term loans as big banks did not see these types of loans as profitable. More and more payday loan companies came into existence to give short-term loans to the blue-collar workers at expensive rates.
The number of payday places soon went from about 500 storefronts to about 22,000 and became a $46 billion industry. In the 2000s, there were more payday places than Starbucks stores and McDonald’s restaurants.
As long as there are people who desperately need to pay their bills, there will be short-term places that will take advantage of their needs.