Loan Shark Meaning
A loan shark offers easy credit to borrowers at unreasonably high interest rates. Such lenders usually trap destitute borrowers who are desperate for immediate cash. They make profits out of exorbitant rates and unethical vehicles of debt recovery.
Loan sharks are usually unauthorized, unregulated, and illegal business entities or individuals. Many of them work as a part of organized crime groups. The interest rates charged by them surpass the legally allowed rates, sometimes reaching a high of 1.5% per day.
Table of contents
- Loan sharks are usually unregistered lenders (individuals or firms) who charge heavy interest rates on loaned money.
- Such usurers don’t demand any guarantor, asset mortgage, or extensive documents from the borrower. They neither go through the client’s credit score nor conduct any background investigation.
- They have no code of conduct and threaten the borrowers to recover the sum even before the due date.
- The loan agreement made by them often holds hidden clauses and are not legally enforceable.
How Does Loan Sharks Work?
Some borrowers find it difficult to secure a loan from authorized lenders. Often underprivileged borrowers who lack a good credit score or steady bank balance turn to informal networks for loans. Many unregistered and illegal lenders hide in the shadows of informal lending.
Loan sharks are usually unregistered lenders who take undue advantage of the needy in their vicinity. They provide instant credit to even the high-risk borrowers who lack proper documents and are incapable of delivering a collateral asset.
Loan sharks seem polite and convincing when entering the deal. However, they charge unreasonably high-interest rates, which a desperate borrower often agrees to. If the borrower fails to clear the debt, these money mongers force them to repay by adopting violent means.
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Are Loan Sharks Illegal?
As per the renowned book Loan Sharks: The Birth of Predatory Lending, this practice was heavily prevalent in the United States from Civil War to the early 20th Century. The brutality of lenders led the media to draw the analogy of sharks who prey on their victims. Funds so offered often came from mysterious sources. Police crackdowns found several predatory lenders working as a part of organized crime.
Many reports suggested that the criminal groups pulled profits from human trafficking, drug selling, and money launderingMoney LaunderingMoney laundering is a criminal act of legitimizing the money acquired through illegal or unethical means by disguising the origin of the crime.. The illegal sources of funds financed the loans of unsuspecting needy borrowers at exorbitant rates.
While offering large sums of loans, predatory lendersPredatory LendersPredatory lending is the aggressive approach followed by the lender to entice borrowers to take a loan which carries a high fee, high-interest rate, unnecessary penalties and other such aggressive credit terms. hardly followed any rules or regulations. They took the highest risk by not performing credit analysisCredit AnalysisCredit analysis is the process of drawing conclusions about an entity's creditworthiness based on available data (both quantitative and qualitative) and making recommendations about perceived needs and risks. Credit analysis also involves identifying, assessing, and mitigating risks associated with an entity's failure to meet financial commitments. and lent without collaterals. The client’s background was also not checked as done by other authorized lenders. They stalked and harassed the client for debt recovery even before the due date or sometimes after the repayment.
Over the years, governments have passed laws and acts to control illegal lending and penalize the offenders. For example, loan sharking is a criminal offence in Canada. Bernie Sanders had proposed a law to cap interest charged by credit cards at 15% in 2019. Law enforcement agents continue to bust illegal lending rackets to prevent victims from being exploited.
Many regulated short-term credit providers also charge unreasonable interest rates, such as payday loans. Some experts suggest doing background checks before borrowing a sum. If the lending company or individual is unregistered, it most likely falls under the definition and boundaries of loan sharking. Some nations have deployed an anonymous helpline number to report predatory lenders.
Recovery Mechanisms of Loan Sharks
Since predatory lenders trick borrowers into entering a deal that is not legally enforceable, they have no legitimate rights to recover their money. Therefore, they usually resort to some of the following unethical practices:
- Sending threats
- Harassing the defaulter
- Indulging in acts of violence
- Defaming and disgracing the defaulter
- Vandalizing home with graffiti or notices
- Complaining to defaulter’s employer
- Sending goons to warn the defaulter
- Kidnapping family members
- Forcing to take more debts to clear the previous ones
As a way to deal with illegal lenders, experts suggest exercising caution. DebtorsDebtorsA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. must report any misbehavior or violence done by moneylenders to the police. Additionally, many firms help debtors overcome the harassment of predatory lenders.
This NY Times report details the harrowing account of a woman in Japan who owed enormous debts to the loan sharks. The woman initially borrowed $200 that became a $40,000 debt over time, spread amongst many lenders.
The 1983 article further mentions that loan sharks grew twice from 1982 in Japan, reaching 43,000. They were operating out of small shops while some were connected to gangsters. They handed out $1250 in just 20 minutes without demanding any collateral.
The only prerequisite was the health insurance card to identify the borrower. Outlets of predatory lending were so many in 1982 that four of them were reported to be the chief lender of consumer loansConsumer LoansA consumer loan is a type of credit given to a consumer to finance specified set of expenditures. The borrower must pledge a specific asset as collateral for the loan, or it may be unsecured depending on the loan's monetary value., overtaking Japanese banks. A study had quoted that a typical borrower in Japan paid $3000 in interest to loan sharks at the time.
It is a rampant practice in Asian countries, with news stories frequently covering the crackdowns. Illegal lending has risen in response to the pandemic and lack of employment opportunities. Cyber loan sharks have been using the internet and social media to trap, threaten and blackmail those in debt.
Loan Sharks vs Payday Lenders
Loan sharks are often the non-legitimate lenders who operate outside the regulations of any government body. In contrast, payday lenders are legitimate lenders regulated by the state government.
The former lends without borrowers’ credit assessment and doesn’t pay any heed to their eligibility. However, the latter follows a credit application process and sanctions fund after clients’ credit analysis and eligibility check.
While both these money mongers offer funds to the loan seekers at high interest rates, they are poles apart from one another. Moreover, it’s surprising that predatory lenders can illegally levyLevyA levy is a lawful process where the debtor's property is seized when the debtor cannot pay the outstanding debts. It is different from liens, as a lien is only a claim against a property, whereas a levy is an actual property takeover to fulfill the obligation. as much as over 100% in interest. A payday lender can legally charge up to 400% interest in a year.
In case of non-payment by the borrowers, loan sharks often threaten or harass them. On the other hand, payday lenders usually opt for the ethical way by complaining against the defaulters in the credit bureaus.
Frequently Asked Questions (FAQs)
Loan sharks are usually illegal or unauthorized lenders. They sometimes operate as a part of organized crime groups. They use various unfair means or threatening tactics on defaulters for recovery. Also, the loan agreement made by them will hold void in a court of law.
Though a loan shark usually holds no legal right but uses various immoral tactics like harassment, threat, defamation, or physical harm for recovering the loan amount.
Yes, they still exist in many countries. They function just like the banks, financial institutionsFinancial InstitutionsFinancial institutions refer to those organizations which provide business services and products related to financial or monetary transactions to their clients. Some of these are banks, NBFCs, investment companies, brokerage firms, insurance companies and trust corporations. , or NBFCs; thus, it becomes difficult for ordinary people to identify such Shylocks.
The debtors should report any misbehavior or violence by such a moneylender immediately to the nearest police station. Also, it is essential to make a parallel complaint in the local trading standards office.
This has been a guide to what is a Loan Shark and its meaning. Here we discuss how do they work, their recovery mechanisms, advantages & disadvantages. You can learn more about Corporate Finance from the following articles –