Payday Lending

Global Growth of the High-Cost Credit Market

Carl Packman

• Publisher: Palgrave Pivot
• Year: 2014
• Print ISBN: 9781137372802
• eBook ISBN: 9781137361103
• Topic: Business
• Subtopic: Accounting
• Index: Business

Payday Lending looks at the growth of the high cost credit industry from the early payday lending industry in the early 1990s to its development in the US as a highly profitable industry around the world.

1

The History and Development of High-Cost Credit and Payday Lending

Abstract: Chapter 1 looks at the development of the formalized payday lending industry and its roots from salary lending to cash checking. It goes into detail about the part that positive perceptions of consumer credit had in the normalization of debt, before looking into the specific conditions that brought about high-cost credit more broadly.

Keywords: cash checking; consumerism; credit; debt; loan sharks; payday lending

Packman, Carl. Payday Lending: Global Growth of the High-Cost Credit Market. New York: Palgrave MacMillan, 2014. DOI: 10.1057/9781137361103.0004.

Research shows that credit money has a long history dating all the way back to the beginning of civilization.¹ High-cost credit has existed for longer than money itself.² Even for the abridged story of high-cost credit as we know it today we have to go a long way back into the history of moneylending in the United States. Indeed as one study concludes, the practice of extending credit against a postdated check, such was the original means of carrying out a payday loan transaction, dates back at least to the Great Depression.³

Back then banks didn’t extend credit to individuals as they do now; this practice was reserved largely for small businesses. To get credit before the 1920s one would have to visit a merchant or a country department store or hope to secure something from friends or family. If none of these were available then a pawnshop may extend a securitized loan, a philanthropic loan (such as from New York City’s Provident Loan Society), commercial small loan lenders (like Household Finance), or a loan shark. According to the Community Reinvestment Association of North Carolina before the “consumer revolution” of the 1920s, poor and working-class Southerners relied on pawnbrokers, illegal small loan lenders, or family and friends; and, even from this early on the poorest in society paid the most for the finance they sought.

According to the Federal Census of 1920, there were 518 pawnbrokers and moneylenders in North Carolina alone⁴—however, we also know the extent to which reliable data on pawnbroking were to come by at this time. Indeed one study from the 1930s, that would question the rigor of the Federal Census, points out: “No national statistics of pawnbrokers have ever been compiled, nor, as far as the author has been able to find out, have any been published even for a single city.”⁵ This is backed up by another study which concluded: “It is difficult to determine the exact number of pawnshops in the U.S., because there are entities that resemble pawnshops in some respects that should not be considered as pawnshops,” that is to say that such firms were “often not licensed or regulated by the state and may operate only on weekends or travel from place to place.”⁶

Only in the mid-1920s did commercial banks begin to make small loans, though at first only to wealthier customers. This may not have mattered too much to many low-income people. It has been noted that the ability to secure credit from friends or families, or even stores in the local area, would not have been as difficult as it sounds today in the modern world. One very interesting point made by Bruce G Curruthers and Laura Ariovich in their volume Money and Credit: A Sociological Approach was that before railroads most people traded locally and so local exchange “embedded people in their own personal social networks, and entailed obligations of neighborliness and civility.”⁷ As such debt, particularly in the late eighteenth and nineteenth centuries, was treated with forbearance, was more informal and flexible, and was loose on legal rectitude. Increasingly, however, in the nineteenth- century exchange became more long-distance as with transportation, and the trust that was maintained originally, in a more local setting, and with people who a debtor probably knew fairly well in the community, became rather strained as finance evolved into a transaction made between relative strangers.

One extremely important development occurred with the advent of installment lending, hire purchase being a popular variant in countries such as the UK, or informally as layaway, the “never-never” or lay-by in Australia and New Zealand. It is believed to be the successful experiment of Cyrus McCormack (1809–1884) and popularized by Issac Singer, the inventor and entrepreneur whose improvements to the sewing machine made it vitally easy for use in home settings before it became more common in 1930s America. Indeed this form of credit was associated with the purchase of relatively expensive household items such as sewing machines (Issac Singer knew what he was doing, clearly), furniture, tractors, pianos, and encyclopedia sets. Installment lending, however, had the greatest effect for the automobile industry. In 1900, around 1 percent of consumer spending was on automobiles. In 1910 that figure was 10.6 percent, and then 31.4 percent in 1925, when cars were on the mass market. By 1950 the typical urban family had spent around 12 percent of the annual income on installment payments alone.⁸

While banks were generally considered to be for the wealthy only, with everyone else catered for outside the conventional economy, installment lending provided those people who were formally outside the system to enjoy the fruits—for what they were worth—of capitalism and consumerism. However, this form of credit was not so altruistic. Let’s suppose that the cash price of an item is $100, a customer would give $10 as a down payment, and agree to pay the additional finance of $100 over the following 10 months. At that point a finance company would buy an installment contract of $100 for $83. The retailer, therefore, would immediately have $93. For that $83 the finance company who bought the installment contract would get $100 over the next 10 months. In addition to that the finance company would pay a retailer a collection fee of 10 percent, meaning that upon completion, assuming all payments were made, the retailer would receive an additional $10. In total the retailer would end up in receipt of $103 from an installment sale rather than $100 from the cash sale. It has been worked out by Louis Hyman that the finance company over ten months would make $7 for a total investment of $90, equivalent to 21.7 percent. On this basis a company could expect to make $20,000 with $100,000 worth of accounts.⁹

The plight of African Americans trying to find access to finance in order to borrow for household items was even more complicated. While mainstream financiers wouldn’t dare lend to a group of people with as much stigma attached, black Americans found themselves more often than not led into the hands of loan sharks and other predatory lenders. Indeed one only had to look in the pages of magazines and current affairs publications read primarily by blacks at the time. The pages of African American newspapers like the Chicago Defender and the New York Amsterdam News overloaded its readers with adverts about access to the “easiest credit terms” on “attractive bedroom and dining room sets.”¹⁰ Similarly installment loans salesmen, it would point out in their reports, went about reassuring borrowers that “if there were any problems meeting the payments . . . ‘leniency’ would be shown.” It is said, however, that if borrowers could pay off the furniture “the retailer would make money, but more profit actually would be had if they made a few payments and then defaulted.”¹¹ It is a familiar story, even today, but profit maximization comes from trapping borrowers, in whatever form of borrowing there is.

Carrying over fees on installment loans, instead of paying back on time and in full, came with no profit incentive for the seller, and thus with no legal or regulatory oversight this type of lending found itself awash with predators. Indeed such regulatory oversight occurred later on where usury laws covered some small-dollar loans and loan sharks, but failed to cover installment lenders. Either regulators were unwise to the problem of predatory installment lending, or it was a calculated attempt to allow it to go unnoticed in order that mainstream finance didn’t have to do business with a certain clientèle.

Indeed the Legal Aid Society reported that often no leniency was shown and, to top it off, while borrowers would be shown new items at the suite, what they would actually be sold was repossessed furniture that had been polished. For this pleasure, by the 1920s the percentage of loans used to consolidate other loans, mostly installment loans, stood at around 50–75 percent. Therefore, it was certainly not beyond the realms of possibility that a large number of people would struggle to pay back money on installment loans for purchases, fail to receive the purchases they requested, or receive knock-off equivalents that have had a lick of polish to cover up the cracks (literally). They might then find themselves in a situation where additional loans were needed, from various lenders, to consolidate those loans.

During 1899–1900, it was found that credit sales made to the T.C. Power and Bro. Department store made up around 78 percent of total sales. Indeed the rise of T.C. Power and Bro., particularly over 1870–1902, is an underappreciated benchmark from which many other small department stores based their commercialization strategies. One of the main strategies was issuing credit to its main customers. Low prices and product diversification were of utmost importance, while allowing substantial credit loans to farmers, including cattle and sheep farmers, was a way to keep customers coming back.

Historians have traditionally focused on larger stores for an insight into what inspired modern means of retail, and keeping a solid custom base, but T.C., a small, family run department store in Montana, with its incentives to nurture return custom based on trust and extending credit products, which would later inspire other more modern forms of credit, including store cards, is clearly the driving force for a service that is responsive to economic realities, social needs (we might think of large grocery stores and reward points cards), and the future of the consumer west.¹²

Bigger stores such as Sears, Roebuck & Company or Macy’s aimed to buck this trend by dealing only in cash at lower prices. For them it was hoped that a customer’s loyalty would follow the low cost. This was not to last. The trend was not bucked, which indicated to all retailers just where the revolution was headed. Credit, as it was said at the time, was just “too effective a tool for selling to consumers.”¹³

With the rise of the consumer, retailers embracing consumer credit, whether out of principle or by having their hands tied by the zeitgeist, it became more necessary to check on the types of credit being sold, particularly irresponsible loans from predatory lenders. It was vitally necessary to do this as the growth in the consumer, on a wide scale, would still only benefit a more affluent household.

Consumer credit bureaus emerged in the late nineteenth century, but remained local. The largest of its kind in New York oversaw around 75,000 individuals. Philanthropic organizations like New York-based Russell Sage Foundation mobilized public opinion against loan sharks, the foremost predatory lender, after more attractive credit options began to dry up in the early twentieth century. The foundation made supporting remedial loan societies like the Provident Loan Society of New York, which offered below market rate loans to the poorest, its raison d’être. It took a huge deal of time to really take off. The concern of the early loan societies was that low-income consumers were not only being excluded from the spoils of a society that allowed middle class consumers to borrow and enjoy the consumerist revolution on future income, but that for even a glimpse of this new life the poor were having to spe...

Table of contents

• Cover
• Title
• Introduction
• 1  The History and Development of High-Cost Credit and Payday Lending
• 2  Payday in the UK
• 3  The European Directive to Consume
• 4  The Australian SACCs Appea
• 5  Back in North America
• 6  Discussion Points
• 7  Conclusion and Recommendations
• Index