Loan Sharks

A loan shark is a person or body who offers loans at extremely high interest rates usually without holding relevant authorization from the local financial regulator. Loan sharks lend money at extortionate interest rates, usually illegally. For example, a loan shark would lend $10,000 to a person with the provision that they be repaid $20,000 within 30 days.

The term usually refers to financial crime but may also refer to predatory lending with extremely high interest rates such as payday or title loans. Loan sharks sometimes enforce repayment by blackmail or threats of violence. Historically, many moneylenders skirted between legal and extralegal activity. In the recent western world, loan sharks have been a feature of the criminal underworld.

There are plenty of small lenders offering loans at profitable but illegally high interest rates. They present themselves as legitimate and operated openly out of offices. They seek customers who they feel are good risks: a steady and respectable job, which means they have a regular income and a reputation to protect; married, which make them less likely to flee town; and legitimate motives for borrowing. Gamblers, criminals, and other disreputable, unreliable types are avoided. They make the borrower fill out and sign seemingly legitimate contracts. Though these contracts are not legally enforceable, they are proof of the loan, which the lender could use to blackmail a defaulter.

The size of the loan and the repayment plans are often tailored to suit the borrower’s means. The smaller the loan, the higher the interest rate. The costs of tracking and pursuing a defaulter (the overhead) are the same whatever the size of the loan. The attitudes of lenders to defaulters are varied: some are lenient and reasonable, readily granting extensions and slow to harass, while others unscrupulously milk all they can from the borrower (e.g. imposing late fees).

The penalties for being an illegal lender are mild. Illegal lending is a misdemeanor, and the penalty is forfeiture of the interest and perhaps the principal as well. These are rarely imposed if the borrower sued, because such borrowers typically cannot afford to sue, nonetheless this is financial crime.

In the United States, there are lenders licensed to serve borrowers who cannot qualify for standard loans from mainstream sources. These smaller, non-standard lenders often operate in cash, whereas mainstream lenders increasingly operate only electronically and will not serve borrowers who do not have bank accounts. Terms such as sub-prime lending, non-standard consumer credit, and payday loans are often used in connection with this type of consumer finance.

The availability of these services has made illegal, exploitative loan sharks rarer, but these legal lenders have also been accused of behaving in an exploitative manner. For example, payday loan operations have come under fire for charging inflated service charges for their services of cashing a payday advance, effectively a short-term (no more than one or two weeks) loan for which charges may run 3–5% of the principal amount. By claiming to be charging for the service of cashing a paycheck, instead of merely charging interest for a short-term loan, laws that strictly regulate moneylending costs can be effectively bypassed.

Licensed payday advance businesses, which lend money at high rates of interest on the security of a postdated check, are often described as loan sharks by their critics due to high interest rates that trap debtors, stopping short of illegal lending and violent collection practices.

Payday loans typically have an average annual percentage rate of roughly 390%, according to the Consumer Financial Protection Bureau (CFPB). Loans not repaid quickly can balloon to hefty multiples of the original sum, with with more than four-in five single-payment loans re-borrowed within a month, incurring additional fees.

Proposed new rules would set up a full payment test requiring lenders to establish that the borrower can afford to make the payments and still pay basic living expenses and other costs, making it more difficult for lenders to refinance the original loan and regulate penalty fees. There are many loopholes in the payday loan business and few protections for consumers. Many states set limits for loan rollovers, but don’t limit opening a new loan on the same day that the old loan is paid off. Some states have a 24-hour waiting period for new loans, and some states have no restrictions whatsoever. ( see predatory lending ).

A big word of caution is that loan sharks will often back their lendings with threats of violence or damage to a person’s reputation as a way to ensure the loans are repaid. If you find yourself in a position of owing to a loan shark, make sure you talk to a financial (and maybe a legal) professional to help you get out of the situation.

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