The Finance Company
Today, when we think about the neighborhood finance company, it usually carries a negative connotation. Storefront lending is now the place you go when the bank won’t touch you, or so many believe.
Personal finance companies played a major role helping American credit get to where it is today.
Let’s turn back the hands of time; back to the age they used to call the “Roaring ‘20’s”. As we stroll along the highways and byways of times gone by we may find that we wish to continue our sentimental journey for another day, week, year or even an eternity. We rifle through our pockets with increasing urgency only to find we need some money.
The mists of time part before us so clearly now and there is not an ATM machine in sight. And we didn’t bring any checks. And even if we did, our bank hasn’t even been established yet. We smile to ourselves confidently- in this age our education and experience will certainly reap the rewards today’s economy fails to offer. But there is only one problem and neither our intellect nor our ingenuity will solve. So if we continue with our walk on the wild side we need money now. Money for some food and a place to sleep.
The problem we face is that we are seeking non-purchase credit – a particularly rare breed of credit in these days. Hearing our mumbling a figure slinks slowly from out of the shadowy mists. It is none other than the legendary “loan shark” coming to our emotional rescue. Wisely, we choose to cruise by and we pass on the invitation. But we still have the problem of getting our hands on some quick cash – just something to help to make ends meet – at least until payday!
To meet the needs of the non-purchase credit seeking public entrepreneurs with adventure capital to put at risk established their very own lending houses. These varied in lending limits, terms of agreements, and even in loan purpose for those special markets that do not follow the rules in the same way as ordinary items do. These houses liked to portray themselves as lifesavers coming to the public’s assistance in emergency situations to offer their aid in the place of the land-prowling “loan shark”.
The finance companies wanted to make borrowers financially responsible and they would often offer advice and counseling as part of their lending programs. But as loan-seeking continued without any apparent interest in the counseling part of these businesses’ services finance companies gradually lessened, then stopped, counseling people.
They had to come to terms with the simple fact that consumers just wanted the loans. The finance companies that insisted on the counseling objectives slowly lost ground to the ones that focused their efforts on giving the people the money until only the latter remained.
But the growth of credit did not go unchecked because the law of supply and demand came into play. You know that as more and more people want a scarce asset the price of the thing that everybody wants will go up. This is seen every holiday season when the price of certain items that everyone wants goes through the roof- even though the original price may have been low. The same thing happens with concert tickets of the most important sports and entertainment events. Front row seats are limited in quantity and you know what happens to the price of these tickets once they are all sold out!
Well, the same thing happens with money. You’ve heard the saying that “money doesn’t grow on threes”; and this simply means that money is not limitless in quantity. So if more and more people want money than the operation of market forces should cause the cost of borrowing money to rise.
If interest may be thought of as the market price of borrowing something, and interest on a money loan may be thought of as the market price of borrowing money. We have noted that credit was extremely popular at this time and that means that there was a great desire to acquire the amount of money available to the public at that time.
Under these conditions you can expect that the price charged for borrowing, the interest on the loan would be rising and would rise until borrowers could not afford to “buy” the money that was available anymore. This would have made the credit market grow to its natural maximum- but it is not what happened.
There were those who thought that charging interest was just not right. These people elected officials who felt the same way too and these officials made laws that put a cap on the amount of interest a lender could legally charge and any lender who charged more would penalized with a fine and jail time.
These laws slowed the growth of the credit market and here is why. Pretend you are the lender with all the money. The market will let you get, say, 18% if you lend your money- but there is a law that says you can only charge 5% or you have to go to jail- what will you do? You will probably look to other places to put your money that will pay you back at least more than 5% and hope that the law changes with regard to interest rates! When you and other lenders put your money elsewhere it reduces the amount of legally obtainable credit and makes people in need of credit have to go to illegal lenders to get needed money.
Much study and debate took place in the late 1800’s and early 1900’s about the level of interest rates and their effects. The goal of the lawmakers was to have the level of interest rate fair for the consumer while not letting it go so high that legitimate lenders would get out of the market. The rules of the credit market today are the ongoing result of the quest to meet that challenge to find the balance between what is fair to the borrower and justly due to the lender.
