In years long gone by, if someone needed money to get them through until payday they might ask for an advance from their employer. They might ask family or friends for a short-term loan. In some cases, they might even visit the dreaded “loan shark,” a shifty individual with certain ties to the criminal underworld.
No self-respecting middle-class family would ever think of turning to a loan shark, of course. An occasional husband with a gambling problem might wind up owing “Guido” a few hundred dollars, and have to worry about goons breaking their legs, but in general most folks found other way s to meet short term monetary needs.
Enter the payday loan businesses. This unlikely business model has all but put Guido and his boys out of business, and now offers a way for folks of varying economic strata to get cash that they need. While the interest rates are as high as a loan shark’s rates – going as much as 450 percent or higher in some states – the short term on these loans makes them affordable.
Like the loan sharks of old, payday lenders have earned something of an unsavory reputation among consumer advocates. Still, many people really enjoy the services offered by payday lenders. Consumers, unlike consumer advocates, have found a truly valuable service.
The payday loan business lends around $50 billion in a given year, most of that to middle class families. That number represents a ten-fold increase from just one decade ago. On top of that $50 billion, Americans pay about $8 billion in fees to access the cash.
In 1990, there were no payday loan businesses. Changes to federal and state laws made the businesses possible in the early 1990s. Today, there are an estimated 25,000 payday loan businesses. Some are small, one-location mom and pop shops, while others are part of a handful of national payday loan chains.
Some states have done away with payday lenders, however. Pennsylvania has begun to enforce a law that goes back to the 1930s limiting fees based on interest. The payday lenders that still exist in Pennsylvania need to get a special permit and become licensed to continue to do business within the state, but none have as of yet applied.
As the economy has gotten worse, payday loans work their way up the economic scale. Middle class families with little or no cushion left turn to payday loans to hold off other creditors or to deal with emergency issues.