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 an example of a loan shark? ›
Loan shark interest rates are extremely high, sometimes up to 300-400% interest on the loan. For example, if you were to obtain a Merchant Cash Advance (MCA) of $40,000, you may be presented with a payment breakdown of $16,000 in interest and fees (aka a factor rate of 1.4).
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 could 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, however, do differ from their payday counterparts in the following regards: They usually offer a (comparatively) lower interest rate. It's possible to borrow larger amounts of money. A vehicle's title is held as collateral, allowing the lender to repossess said vehicle if a borrower defaults on their loan.
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? ›
Signs that someone who has offered to lend you money is a loan shark
- No paperwork – paperwork makes something seem more legitimate, and loan sharks avoid.
- Cash loans or bank transfers – although more loan sharks are now using bank transfers, they usually prefer to deal with cash.
Those who are underbanked or don't have access to a traditional bank account. Recent immigrants, undereducated individuals and those of Black or Hispanic descent. Young adults who took out student loans.
What is the payday lending rule? ›
The CFPB's rule prevents lenders from attempting to collect payments from people's bank accounts in ways that may rack up excessive fees or deviate from what they expect.
Why should you avoid payday lenders? ›
Payday Loans Are Very Expensive – High interest credit cards might charge borrowers an APR of 28 to 36%, but the average payday loan's APR is commonly 398%. Payday Loans Are Financial Quicksand – Many borrowers are unable to repay the loan in the typical two-week repayment period.
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.
What is a payday loan vs personal loan? ›
A payday loan is an extremely short-term loan usually due within a month, while the term for a personal loan is at least two years. Personal loans have a much lower interest rate than payday loans, which can be helpful if you're using it as a debt consolidation loan or to pay for an emergency.
Why is it called a payday loan? ›
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.
How are payday loans different from other loans? ›
Key Differences
They have much longer repayment periods. Cost: Payday loans have much higher interest rates than personal loans and may overwhelm borrowers with hidden fees and charges. Accessibility: Payday loans can be easier to obtain than personal loans because there are few requirements for them.
What is the difference between a payday loan and a short-term loan? ›
The main difference between short-term loans and payday loans is usually the number of repayments you make. In general terms, you usually pay back a payday loan about a month or two after you take out the money – in lump payments. With short-term credit, you could pay your loan back from two to twelve months.
What are two advantages of a payday lender over a bank? ›
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.
Believe it or not, loan sharks still exist – and they can be dangerous as ever. A loan shark is a person or entity that loans money at high interest rates and will use threats of violence to collect repayments or debt.
How do you catch a loan shark? ›
Another way to spot an unlicensed moneylender is to look at the amount they're open to lending you. Chances are they'll approve any amount without looking at your income level. They won't even ask for any proof of income such as payslips and income tax statements to verify that you have the means to repay your loan.
What is another name for a loan shark? ›
What is another word for loan shark?
| usurer | moneylender |
|---|
| extortioner | usuress |
| Shylock | pawnbroker |
| lender | financier |
| banker | moneymonger |
5 more rowsIn the State Investigation Commission hearings on loan sharks, the term “vigorish” has been used by witnesses to refer to the exorbitant interest exacted by the usurers. It is a term also used by gamblers to refer to the advantages in betting odds that the bookmaker takes for himself.
