The Origin of Debt Consolidation Loan
Before the middle of the twentieth century, consumer debt was relatively unheard-of. Financial institutions (such as banks) rarely extended credit to individuals because it was difficult to assess their financial reliability, and because managing such loans was expensive and time-consuming. The concept of debt consolidation applied exclusively to matters of public (government) debt. In 1886, for example, Japan passed the drastic Consolidation of the Public Loan Act to convert the various loans that made up the national debt to a lower interest rate and a single set of terms.
The period after World War II (which ended in 1945), however, was marked by a number of economic developments in the United States, including the mass production of consumer goods, the increasing urbanization of American society, and the advent of consumer credit. By the 1960s more and more Americans were taking on consumer debt, and there was a dramatic rise in the number of personal bankruptcies. (Bankruptcy is a declaration of financial insolvency, or inability to pay off one’s debts.) Alongside these trends, independent lending companies began to offer debt consolidation loans to households in financial crisis. Many of them charged exorbitant interest rates. The practice of taking advantage of people in financial trouble by lending them money at very high interest rates or charging high fees to initiate the loan is called predatory lending.
