What Is a Loan Shark?
A loan shark is a person or an entity that loans money at extremely high-interest rates. They often use 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.
Loan sharks charge borrowers interest usually far above any established legal rate. You should avoid them. Even in a serious cash crunch, there are safer alternatives.
How a Loan Shark Works
A loan shark can be a person or an organized network offering to provide loans at high-interest rates. They may be found in poor neighborhoods, on the internet, or through personal acquaintances. Their funds are usually from unidentified, private sources. 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 often call on the debt to be repaid at any time. They often use the threat of violence as a means of forcing repayment. In most cases, dealing with a loan shark is a bad idea. It is best to seek other alternatives for many reasons:
- Loan sharks lend money at extremely high-interest rates.
- They often use threats of violence to collect debts.
- They can be members of organized crime syndicates.
- Payday lenders are similar to loan sharks in many ways but operate legally.
Why a Loan Shark is Bad News
Loan sharks will start out appearing professional and helpful. If you keep up your repayments, they might even stay that way. However, even if you do, any money you borrow will come at a very high price. There are many risks attached to borrowing from a loan shark:
- Insanely High-Interest Rates – You pay far more in interest than you would through any legal borrowing.
- Threats of Violence – You might be harassed or threatened if you get behind with your repayments. There have been reports of people being intimidated or attacked
- Perpetual Cycle – You might be pressured into borrowing more money to repay one loan with another. As a result, you end up in a spiral of debt that you can never repay.
Loan Shark vs. Payday and Other Alternative 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. Most request 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.
Some payday lenders may approach the level of loan sharks. Like loan sharks, payday lenders offer loans at extremely high-interest rates for short periods of time. However, payday loans 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%. But, some payday lenders are 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 even higher than the rates charged by payday lenders.
Payday lenders are not known for violent tactics to collect an outstanding debt. But, they offer short-term rates on payday loans with extremely high-interest costs. This makes it difficult for a borrower to repay. Generally, payday lenders will follow standard collection procedures if delinquencies occur. They will report missed payments, and loan defaults to credit bureaus.
There are Alternative Lenders. Other types of lenders have emerged online to offer individuals and businesses credit alternatives. These lenders offer alternatives compared to traditional loans. Many of these alternative 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. Often, these 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.
Alternatives to a Loan Shark
There are reputable lenders you can turn to instead of loan sharks. Even if your income is low, you have a poor credit rating or you only need a small amount for a short while. Check that they are authorized by the FCA, and shop around for the best deal.
Credit unions
Look into borrowing from a credit union. You will have to become a member and they might ask you to save an amount before you can borrow. But, they are a good alternative to consider.
Help from the government
If you are short of money, ensure you are getting all of the benefits you are entitled to. If you desperately need to borrow money, you might be able to apply for an interest-free Budgeting Loan from the Social Fund. Alternatively, other help might be available from your local authority governments.
Charitable Organizations
If you’re thinking about using a loan shark because you can’t borrow money anywhere else, there are a number of organizations that offer free debt advice.
Loan Shark and the Law
Although some loan sharks resort to intimidation and even violence, they are not beyond the law. Any lender – authorized or not – who harasses you is breaking the law. Some loan sharks will threaten you by saying you will be prosecuted and even sent to prison if you don’t pay up. This can’t happen. An unauthorized lender such as a loan shark has no legal right to recover the debt. In fact, they have no legal right to make you pay the loan back at all – because the loan is illegal.
Reporting a loan shark
If you have been approached by someone who threatens you for an outstanding loan, you need to report them. Contact the police immediately if you are in danger.
Why People Resort to a Loan Shark
People in desperate financial straits will borrow money in any way possible. Loan sharks offer speed, ease, and convenience among other reasons. Unlike legitimate lenders that have strict lending criteria, illegal lenders offer instant decision loans and have lenient criteria. People who need urgent cash and borrowers who have been turned down by conventional lenders often feel tempted. Many customers have a low credit score, feel desperate, and have few other options. Borrowers with foreclosures, missing loan payments, and delinquent accounts also look for short-term loans.
Consumers with maxed out cards, arrears, and other financial worries also resort to high-interest loans. Loss of employment, loss of income, prolonged illness, lack of health insurance, divorce, and death in the family are other reasons why people contact loan sharks. Some people borrow on more than one occasion which leads to a reliance on quick loans. The problem is that this is a quick fix and a short-term solution. Borrowers with serious financial problems may become trapped in debt. (Source:financialized.com)
Frequently Asked Questions
Is it a bad idea to borrow from a loan shark?
When you first meet them, loan sharks will usually seem friendly and understanding of your problems. They do this to gain your trust and make you more likely to borrow money from them. They may even behave nicely after a period of intimidating behavior, to keep you off balance and ‘train’ you to stay on top of your repayments. There are many risks with borrowing money from a loan shark. They include:
- A high and often unmanageable interest rate. Loan sharks charge much higher interest than a high street lender would charge you
- Being harassed or threatened if you fall behind on payments
- Coming under pressure to borrow even more money to repay your original loan. Doing this gives the loan shark more ‘power’ over you, and makes you more vulnerable to intimidation and violence
What can I do about loan shark debt?
If you’ve borrowed money from a loan shark, the most important things to remember are:
- You’ve not done anything illegal and you won’t get in trouble with the police. It’s illegal to lend money without a license, but it’s not illegal to borrow money from a loan shark
- You don’t have to pay the money back. If the money was lent illegally, the loan shark has no legal right to collect it and they can’t take you to court to get it back
- Don’t stop paying a loan shark if you’re worried about your safety. Get advice from a specialist before you make a decision
Can a loan shark take you to court?
Loan sharks can’t pursue you through the courts for the money you owe them. This is because the way they’ve lent you money is illegal.
Can a Loan Shark be Dangerous?
Yes! Loan sharks sometimes threaten borrowers with violence, jail, and legal prosecution. It is a very stressful experience. If you are harassed, make sure you contact the police or local authorities. Better yet, avoid predatory lenders altogether and contact reputable and licensed providers that offer reasonable rates.
Up Next: What Is Bank-Owned Life Insurance (BOLI)?
Bank-owned life insurance (BOLI) is a form of life insurance purchased by banks for their key employees. However, the bank is the beneficiary and also usually the owner of the policy. This insurance is used as a tax shelter for financial institutions. They leverage its tax-free savings provisions as funding mechanisms for employee benefits.
All employee benefits for these selected employees are covered under the plan and paid out from this fund. All premiums paid into the fund, in addition to all capital appreciation, are tax-free for the bank. As a result, banks can use the BOLI system to fund employee benefits on a tax-free basis. In effect, bank-owned life insurance is a kind of tax shelter providing funds (tax-free) to the bank to offset costs.
