Lending has been something which has existed for hundreds, if not thousands of years. Due to obvious reasons, the history on online lending for payday loans and the like is very short, but the roots of traditional lending can actually be traced back to around 3,000 years ago. Whereas, online lending started in 1985. The evidence to support this are loan contracts from Mesopotamia which display the development of the credit system and even speak of the concept of interest on loans.
Lending has always been of great importance. In fact, the expansion on human civilisation would not have been possible without it. Take for example the discovery and exploration of the New World, Spain was funded for taking part in this through lending. Furthermore, the Industrial Revolution of the late 18th and early 19th century was made possible through loans. Lending has proved to be productive to society throughout time and has funded some of the greatest projects which we recognise and use to this day.
In Ancient Rome, banking in all forms was carried out by private individuals who could offer loans. What these individuals offered appears to be similar to what we know as ‘payday loans’. The structure for lending remains pretty much the same.
In general, workers of the land would borrow large sums of money so that they could plant their crops. They would then repay the loan come the time of the harvest.
There is evidence of Ancient Roman’s using what we know as a ‘collateral loan’, where items were held as collateral to keep the risk down if the person could not repay.
Dark and Middle Ages
In the year 325 AD, religious leaders had decreed that any form of lending would see an interest rate of 1% per month.
It was the case that Christians were forbidden from lending money with any interest due to the fundamentals of Christianity. Therefore, the Jewish people tended to take on the role as lender – but could only lend money with interest to gentiles (non-Jews) and this was only accessible outside of the main city walls.
Interestingly, lenders tended to conduct their business from a bench, which is where the word “bank” originates from. Furthermore, it was traditional for a retired lender to smash up his bench as mark of withdrawal from the trade – hence the term “bankrupt”.
The mid-20th century was a catalyst for a major shift in the responsibly held by lenders and borrowers. Instead of physical collateral used to keep the risks of lending low, the mainstream method shifted to financial data.
In 1950, a business man named Frank McNamara paid a bill with a small cardboard card, which is what is known as a Diners Club Card today. Eight years later, the bank of America launched the BankAmericard (which is Visa now), becoming a valid form of payment.
The FICO score first gained recognition in 1995 and was used as a way to evaluate mortgage loans. By 1959, lenders officially started using FICO scores to make informed credit decisions.
History of Payday Lending
The role of payday loans in the UK, only really gained momentum in the early naughties as a way to offer quick finance through the use of online mediums such as the Internet. Wonga.com took payday lending to a new level when they launched in 2005, where they really took off around 2010 offering millions of pounds worth of ‘micro loans’ per month.
At one point, there were around 200 payday lenders in the UK and hundreds of comparison sites and brokers. Since the introduction of strict regulation, the number as of 2018 is only around 40/50 lenders and a handful of comparison brokers such as allthelenders.