From Hawala To Payday Loans Online – The Complete Guide
Hawala is an ancient method of lending money that has been used for many years. Transactions between Hawala brokers and their customers are done without any written contract because the system is heavily based on trust. What are the origins of Hawala and how has this ancient form of credit evolved into the new products of online payday loans? The basic principle of Hawala, which translates as ‘Trust’, is a means of transferring money without physically moving currency in the form of notes or coins.It is mainly in operation in Arab countries and South Asia.
Credit network of trust
The Hawala system requires two brokers for each transaction. One broker is used by the sender and another broker is used
by the person receiving the funds. The person sending the money contacts a local broker and specifies a password that is to be used to release the funds.
This broker then contacts the recipient’s broker and advises him about the password. The person who is to receive the funds has also been made aware of the
password and once he has informed the second broker what this is, he can have the funds. The two brokers receive a small commission for each transaction.
That’s the whole process. There are no written contracts, no need to produce any forms of ID, commission rates are low as Hawala relies on trust and
honour. Brokers keep track of debts and sometimes these are settled by offering goods or services in lieu of cash. Hawala is an alternative system that
runs alongside established banking practices in countries where it has operated successfully for many years.
Hawala has been in operation for many hundreds of years before the invention of online loans, and is a legitimate form of banking in some countries. But understandably, governments do not like
this form of credit brokering as there is no way of keeping track of income or taxes that may be due on money that has been transferred by this method. The
system has been declared illegal in some countries, such as the USA. This is a result of government bodies trying to cut down on money laundering issues
and the possibility of terrorist groups being funded by this credit system.
From ancient Hawala to online loans
So, how has this ancient line of credit evolved into the latest online payday
loans that are now offered by hundreds of companies in the UK? And, exactly what is a payday loan?
Sometimes called cash advances, online payday loans are granted for a short term and are regarded as unsecured loans. i.e. there is no requirement to pay
back the loan using any assets such as a business, house or a car. There are some rules that apply to payday loans that are similar to bank loans.
Companies must publish the APR (annual percentage rate) of interest but, when first introduced, there was no limit on the rate of interest that they could
charge. As long as the person applying knew the rate being charged, that is all that was required. Some companies charged excessive rates. This led to
criticism by the financial industry and other organisations that payday lenders were exploiting vulnerable people by charging excessive rates of interest.
In addition, there had been concern that many people did not understand how easily the debt could spiral out of control if the due payment date passed
without the full amount of the loan being paid off.
Online companies which offer payday loans do have to be licensed under the Consumer Credit Act, and there are regulations about how the service is
advertised. There are some comparison websites where you can go to look at how the companies match up to each other. The newly created Financial Conduct
Authority which has taken over from the FSA (Financial Services Authority) is in the middle of making some major changes to ensure that customers do not
find themselves in a spiralling debt situation that rapidly becomes unmanageable.
The history of credit stretches back to bartering, the Hawala system, promissory notes (IOUs) and has taken many different forms along the way. Mortgages,
bank loans, car loans, hire purchase agreements, credit cards and even the tab at a local shop or pub are all forms of credit. Used in a sensible manner,
credit is a useful tool but it can easily become a poor master if the consequences of non-payment are not fully understood. It is very easy to be sucked
into signing up for a loan that is not really the best way forward. So, before applying for an online payday loan, always look at all the other options.
There have been some instances where unscrupulous businesses used celebrities to advertise online payday loans, and this has led to a major criticism of a
system which has exploited ordinary people by making them think that a payday loan could lead to a celebrity lifestyle.
For many people, the existence of loans online can prove to be a helpful means of getting through a short term financial gap. As long as the terms
and conditions of the loan are fully explained and understood, online payday loans can be the right way to go. The main aspect that should be considered is
whether or not you can pay the full amount when it is due. Failure to do this could mean spiralling interest costs that quickly add up to a much higher
amount than the initial amount borrowed. A reputable lender will always consider whether or not you can really afford to borrow the amount you need, will
explain exactly how the interest is calculated, advise you about any administration fees and will make sure that you understand the consequences of
non-payment when the due date is reached.
Competition And The Ethics Of Lending
There is a great deal of competition among online payday lenders with many unscrupulous companies vying to get the most trade. If you just Google ‘online
payday loans’ you will get results that offer loans with no credit checks, loans for people on benefits and loans for people that have a bad credit
history. Companies which offer this kind of credit are not doing anyone any favours and usually charge the highest interest rates, as they are taking on
a high risk of non-payment. The rewards for this are vast, but the profits that are made are at the expense of vulnerable people who are desperate for a
short term loan to get them through an unexpected crisis. However, there are reputable companies that look at affordability, limit the amount of times a
loan can be rolled over and put a cap on borrowing. The Financial Conduct Authority has had a great deal of input into making sure that companies only lend
to those who can actually afford to borrow. Additionally, the FCA in in the process of enforcing regulations that will make sure that borrowers fully
understand how much the loan will cost and the consequences of non-payment.
If you are thinking of approaching an online payday loan company to help you get through a sticky financial patch there are a few points to consider before
you make the application. If possible, try to find an alternative solution. Family and friends may be able to help for a short term money crisis. If
is no other way and you want to apply for an online payday loan, then consider the rate of interest, exactly how much money will have to be repaid, look at
any administration fees, make sure you can meet the deadline payment date and borrow as little as possible. Remember, one person’s line of credit can
easily become another person’s burdensome debt. A reputable online payday lender will only allow you to borrow money if you can afford to make the
repayment. By finding the right company to deliver your online payday loan, you will be able to get through your short term financial crisis and come out
the other side with no long term debt.
The Origins Of Credit in the UK
‘Neither a borrower nor a lender be’ says Shakespeare in the iconic play Hamlet. These may be very wise words, but in today’s modern society, most people
use credit of one form or another. The history of credit goes back for hundreds of years. Even working for an employer is a form of credit as you are
providing your services but don’t get paid for them immediately. There have always been formal and informal loans, borrowing and gifts of money in return
for services. When times were hard during the Victorian years, there were many people who used credit to pay for their food and some of them ended up in a
debtor’s prison. This led to many families being put into the workhouse and subsequently owing money for the rest of their short and miserable lives.
Thankfully, you can no longer be imprisoned for owing money and although using credit has helped to grow and sustain the economy, in recent years, there
has been a massive increase in lending that has seen an unprecedented amount of people get into serious debt.
To understand the nature of the modern credit sustained society we have to look back to a time when most people lived off the cash that they received as a
weekly or monthly wage. During the 1940-50’s, there was virtually no such thing as credit for the working classes. With the exception of a few companies
like the Prudential which loaned money against a life insurance policy, credit for the working classes was almost impossible to attain. Local shopkeepers
would allow families to have goods and settle their bill at the end of the week when their pay arrived but overall, most people had to save up for consumer
However, things changed radically during the 1960’s, a period when there was full employment and consumerism took off in a big way. Suddenly you could buy
goods on a hire purchase agreement, which meant you could have the goods immediately but pay over a length of time that was specified in the agreement.
This could be 6 months, a year or even two years. There were some restrictions as a hire purchase agreement could only be taken on by someone over age 21
and initially, you had to be a man. Some companies would only allow house owners to sign up to this form of credit but gradually restrictions began to be
lifted as businesses could see profits taking off massively.
A mortgage was another form of credit that was restricted to mainly men during this period, and the criteria for obtaining a mortgage were very strict. A
deposit was required before a loan could be granted, and you could only borrow an amount equal to two and half times your annual income. However, as women
were making inroads into the workforce, it was sometimes possible to allow a little extra against their income. In the main, however, women were expected
to leave work to bring up a family and were not deemed creditworthy in the long term. So, credit during the fifties and early sixties was mainly allowed
only to buy a home or to make purchases of furniture or electrical goods. No one would have entertained the thought that they could pay for a holiday or
any other form of entertainment by credit.
Diners Club, Barclaycard And Other Credit Cards
The Diners Club card was introduced in 1950 and was allowed to be used in a few restaurants in New York only. This was one of the most influential ideas
that changed the face of society, and it was soon followed by other companies like American Express. However, in the UK the biggest and most single
influential change in credit was triggered by Barclays Bank which introduced the first credit card into the UK. Launched in June 1966, Barclaycard was the
forerunner to all of the credit cards that are in use today. Although credit cards were already being used in the USA, Barclaycard faced incredible
opposition in the UK as this type of payment was seen to be associated with ‘undesirable American influences’ and it was thought that it would lead to
rampant inflation, as people would be tempted to pay for things they could not afford.
The credit limits set by Barclaycard were low and again, it was necessary to fit strict guidelines before you were granted a card. When paying off the
amount owed, you could choose to pay all or a small percentage of the debt and roll the rest of it over to the next month. A massive advertising campaign
helped to sell the idea of a credit card to millions of people and eventually the card was used for the dual purpose of a credit card and a cheque
guarantee card. Suddenly, there was money for luxuries, and you didn’t have to save up anymore. The age of instant gratification had arrived.
Barclaycard was swiftly followed by a series of other credit cards, including the now defunct Access card which was swallowed up by Master Card. Other
charge cards like American Express have a different set of regulations, as these cards have no limit but do have to be paid in full at the end of each
month. American Express was mostly used by businesses for their employees to charge expenses, but has since become more common for personal use too. Once
banking regulations were relaxed, many banks brought out their own credit cards and now, there are hundreds of different cards each with their own set of
regulations, interest rates and minimum payment requirements. There are a host of money comparison websites where you can look at all the different cards
on offer to see which is the cheapest. As companies attempt to get a majority share of the business, there are special offers that charge 0% interest for a
year, but beware the administration fees that often accompany these deals.
During the late 1990’s, banking regulations were relaxed in a big way and banks began to increase the limit on credit cards without any consideration of
whether customers could really afford the amount they were borrowing. Personal debt rose to unsustainable amounts and inevitably there was a financial
meltdown that came to a head in 2007.
The global 2007 ‘Credit Crunch’ was labelled the worst financial crisis since ‘The Great Depression’ in the 1930’s. It affected the UK remarkably, and
society is still trying to recover. However, the world learnt a valuable lesson that year, and ever since, financial institutions have been working to
improve the quality and suitability of their services to avoid another economic meltdown.
Category: Payday loans