What Is a Loan Shark?
A loan shark is a person who—or an entity that—loans money at extremely high interest rates and often uses threats of violence to collect debts. The interest rates are generally well above an established legal rate, and often loan sharks are members of organized crime groups.
Key Takeaways
- Loan sharks lend money at extremely high interest rates and often use threats of violence to collect debts.
- They are often members of organized crime syndicates.
- Payday lenders are similar to loan sharks in many ways but operate legally.
Loan sharks charge borrowers interest usually far above any established legal rate; even in a serious cash crunch, there are safer alternatives.
How a Loan Shark Works
A loan shark can be a person within a personal or professional network offering to provide loans at high interest rates. They may be found in underbanked neighborhoods, on the internet, or through personal networks. Their funds are usually from unidentified sources, and they work for personal businesses or unregistered entities.
Loan sharks do not require background checks or credit reports. They will lend large sums of money with the intention of gaining high levels of interest in a short time. Loans from loan sharks charge interest rates far above any regulated rate. For example, a loan shark might lend $10,000 to a person with the provision that $20,000 be repaid within 30 days. These lenders may also call on the debt to be repaid at any time, using violence as a means of forcing repayment.
In most cases, business dealings with a loan shark are illegal; it is best to seek other alternatives.
Loan Sharks vs. Payday and Other Alternative Lenders
Some payday lenders may approach the level of loan sharks, offering loans at extremely high interest rates for short periods of time. However, these rates can be completely legal. Standard usury laws typically dictate the maximum interest rates a lender can charge in each state, ranging up to approximately 45%. Payday lenders are often granted exceptions, charging annual interest rates of up to 400%. They can offer such high rates because of the special provisions offered by state governments. Loan sharks typically charge rates higher than the rates charged by payday lenders.
Payday lenders are a legal form of high-interest lending offered to borrowers. They are typically registered entities that follow standard credit application procedures, requesting personal information for a credit check. Payday lenders also require proof of employment and income. Payday lenders usually base the principal offered on a borrower’s income and credit profile.
While payday lenders are not known for violent tactics in debt collection, they do offer short-term rates on payday loans with extremely high interest costs, making it difficult for a borrower to repay. Generally, payday lenders will follow standard collection procedures if delinquencies occur, reporting missed payments and defaults to credit bureaus.
Other alternative lenders have emerged in the credit market to offer individuals and businesses credit alternatives. These lenders offer alternative products comparable to traditional loans. Many of these loans will have lower borrowing standards, making credit more affordable for a greater portion of the population. Loan application procedures will generally be similar to standard conventional loans. However, loan applications are usually automated, and lenders are willing to work with borrowers if conflicts arise. These lenders can offer varying principal amounts and interest rates to a variety of borrowers.
Is Borrowing From a Loan Shark Legal?
It is not illegal to borrow from a loan shark, it's just extremely risky. Loan shark are themselves illegal lenders, but their victims haven't broken the law.
What Is a Payday Loan?
A payday loan is a short-term loan meant to be repaid by your next payday. Payday loans typically have extremely high interest rates and are often considered a form of predatory lending.
What Are Some Alternatives to Payday Loans or Loan Sharks?
If you need money quickly, consider asking a family member for help or taking out a personal loan. Even if you have bad credit, you may still qualify for a personal loan, which should have lower interest rates and more reasonable repayment terms.
The Bottom Line
Loan sharks often prey on those that feel like they have no other alternative. If you need cash quickly, think through your options. Engaging with a loan shark seldom ends well, as it runs the risk of serious financial (and even physical) harm.
FAQs
Loan sharks typically charge rates higher than the rates charged by payday lenders. Payday lenders are a legal form of high-interest lending offered to borrowers. They are typically registered entities that follow standard credit application procedures, requesting personal information for a credit check.
What is a loan sharking example? ›
Here are some examples of a loan shark: A private lender who threatens violence to collect a debt. A predatory lender who charges excessive rates of interest. An organized crime boss who makes or finances extortionate extensions of credit.
What is considered a payday lender? ›
While there is no set definition of a payday loan, it is usually a short-term, high cost loan, generally for $500 or less, that is typically due on your next payday. Depending on your state law, payday loans may be available through storefront payday lenders or online.
What are payday loans examples? ›
A payday loan is a short-term, high-cost loan. A borrower will write a post-dated check for the full amount of the loan and repay it or have the funds deducted from their account on their next payday, up to 31 days later. For example, a borrower writes a $300 check, pays a $45 fee, and receives $255 in cash.
What is one key difference between payday loans and title loans? ›
Title loans are short term loans that take your car title as collateral. Payday loans are short term loans that need a postdated check. In the absence of a postdated check, this could entail giving the lender access to your bank account, usually where your paycheck is coursed through.
Is a loan shark a lender? ›
A loan shark usually has lots of customers and lends money like a business, but their lending is illegal. Loan sharks often take other illegal action to collect the money they've lent you, such as threatening violence or taking away your credit cards or valuables.
How do you identify a loan shark? ›
Loan sharks may use aggressive sales tactics to convince you to take out a loan. They may also try to rush you into signing a contract without giving you time to read it properly. If a lender is putting undue pressure on you to take out a loan, it is likely they are not operating within the law.
What counts as a payday loan? ›
Payday loans are short-term loans for small amounts of money. They are available from high street shops and internet sites. Payday loans can be easy to get but interest rates are very high.
Why are payday loans called predatory lending? ›
Predatory lending is any lending practice that imposes unfair and abusive loan terms on borrowers, including high-interest rates, high fees, and terms that strip the borrower of equity. Predatory lenders often use aggressive sales tactics and deception to get borrowers to take out loans they can't afford.
Why are they called payday loans? ›
The term "payday" in payday loan refers to when a borrower writes a postdated check to the lender for the payday salary, but receives part of that payday sum in immediate cash from the lender.
What are the advantages of payday loans?
- Easy to access. The most significant advantage for many borrowers is that payday loans are convenient and quick to access. ...
- They have fewer requirements than other loans. ...
- You can get approved with bad credit. ...
- It is an unsecured loan. ...
- There is a 14-day cooling-off period.
Answer. Payday lenders provide short-term loans at high fees and interest rates, targeting low-income borrowers, while banks and credit unions offer deposit and loan services with better terms. Banks may have superior online services, but credit unions typically offer lower rates and fees, focusing on member benefits.
Is a payday loan or title loan better? ›
Payday loans pose less risk of losing personal property, while title loans feature slightly lower (though still rapaciously high) interest rates and allow for more significant loan amounts.
What type of crime is loan sharking? ›
Illicit loan sharking is treated as a high-level crime by law enforcement, due to its links to organized crime and the serious violence involved.
Is it illegal to get money from a loan shark? ›
"Loan sharks" are people who charge you to borrow money but are not regulated by the Financial Conduct Authority. What they do is illegal, but you have done nothing wrong. It is not a crime to borrow money from someone.
Does loan sharking still exist? ›
Yep, loan sharks still exist. Because not all loans are acquired from a legal institution ( bank) or certified money lenders. They are people out there who are either desperate or have bad credit and are unable to access loans the right way due to certain requirements, so they're forced to seek out a “darker” option.
Can I lend money to a friend and charge interest? ›
You can lend money at interest, provided that the interest rate falls within the appropriate legal guidelines. Most states have usury laws that limit the maximum amount of interest that a lender can charge. In addition, you should also consider the Applicable Funds Rate prescribed by the Internal Revenue Service (IRS).
