What Is a Loan Shark?
A loan shark is a person who – or an entity that – charges borrowers interest above an established legal rate. Often loan sharks are members of organized groups offering short-term loans who use threats of violence for debt collection.
How a Loan Shark Works
A loan shark can be a person within a personal or professional network offering to provide loans for large sums of money. They may be found in under-banked neighborhoods, on the internet or through personal networks. Their funds are usually from unidentified sources, and they work from 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, 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.
[Important: Loan sharks charge borrowers interest usually far above any established legal rate; even in a serious cash crunch, there are 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.
Example of an Alternative Lender
Opploans is an online alternative lender with broader relative credit standards. Opploans offers credit amounts of between $500 and $5,000, with repayment terms of between nine and 18 months and interest rates ranging up to 199% annually.