A loan shark is a dangerous person or group that offers illegal loans with high interest rates and expects to be paid back quickly. Often, loan sharks resort to violence to collect unpaid debts. In this article, we will explain what loan sharks are, how they operate, how their loans compare to legal short-term loans, and what you can do to spot a loan shark.
Loan sharks prey on those who cannot pass the credit checks required to secure a loan with most legal lenders. These illicit lenders will not introduce themselves as “loan sharks,” but they will offer you a quick loan with a high interest rate and a short repayment schedule. Because they can get you the money you need quickly regardless of your credit, loan sharks’ offers can be tempting, especially if you are desperate.
Loan sharks appeal to individuals who need a significant loan quickly, or to individuals who are unable to secure a loan through an established entity.”
But working with a loan shark is dangerous and illegal. You should never get into a business deal with a loan shark. The opportunity you hope to take advantage of, or the danger you hope to avert, by taking money from a loan shark won’t be worth the high risk involved. And there will very often be other ways to get financing when you need it, such as with a personal loan.
What is a loan shark?
A loan shark is a person, normally within a professional network or organized crime group, who provides loans at high interest rates. These interest rates are typically much higher than legally allowed. High interest rates make it difficult to repay the loan as agreed. Because borrowers can find these loans difficult or impossible to repay, and because courts and legal authorities are not going to help enforce illegal contracts, loan sharks are known for their use of violence to collect debts.
Would loan sharks be safer if they were legal?
Though our position on these illegal high-interest loans should be clear — agreeing to one is a big mistake, period — there’s always been a demand for them by people who think they meet some need or solve some problem. In a controversial book last updated in 2018, Walter Block, the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at Loyola University (as of a March 2022), argued that loan sharks, like other lenders, “perform a necessary and important service” and attributed their violent tendencies to the illegal status of their loans:
When courts refuse to compel debtors to pay their rightful debts, and they prohibit the lending of money at high rates of interest, the underworld steps in. Whenever the government outlaws a commodity for which there are consumers, be it whiskey…or high interest loans, the underworld enters the industry that law-abiding entrepreneurs fear to service.”
How do loan sharks operate?
Loan sharks typically operate in professional groups in under-banked neighborhoods, on the Internet, or through personal connections. They tend to work for unregistered entities or personal businesses, rather than established banks or credit agencies. The funds that a loan shark uses to offer you a loan are likely personal funds or from unidentified sources.
Loan shark clientele
Loan sharks appeal to individuals who need a significant loan quickly, or to individuals who are unable to secure a loan through an established entity. Typically, a loan shark does not require a background check or a credit report. This is why individuals who are unable to secure a traditional loan are at particular risk for being targets of a loan shark.
Loan shark products
Loan sharks operate by offering you a large sum of money — or a loan — with conditions that include high interest rates, or a high annual percentage rate (APR). State laws typically dictate the legal APR in that state, and most states do not allow an APR higher than around 45%. A minority of states do permit higher rates, however.
In contrast to lenders complying with states’ rate caps, loan sharks can charge APRs of over 500%! Loan sharks also expect the loan repayment in a short period. In this way, a loan shark makes money by gaining high levels of interest in a short period. It is also common for a loan shark to call for the debt to be repaid before the scheduled repayment period has ended.
Loan-sharking $15K for 30 days
For example, loan sharks may offer a $15,000 loan with the agreement that $30,000 will be repaid in 30 days. This means they expect you to repay double the amount borrowed in just one month. (That’s an APR of 1,200%.) Additionally, loan sharks may demand repayment of a 30-day loan after only 20 days. Since the contract is illegal, you obviously can’t take them to court for violating it. When you are unable to repay on the earlier date, they may resort to violence to force repayment.
By the 1890s, loan sharking — as the practice of high-interest lending came to be called — had become a large cottage industry, especially west of the Ohio River. Merchants, businessmen, and even clergymen with a few thousand dollars to invest eagerly became high-interest lenders.” — Loan Sharks: The Birth of Predatory Lending
Loan sharks vs. payday lenders vs. overdraft loans
Loan sharks do share some similarities with payday lenders. Both entities offer high-interest lending with a short repayment schedule. A crucial difference, however, is that loan sharks operate illegally while payday lenders operate legally and will only offer relatively small loans.
Overdraft loans are another similar product that many banks and other financial institutions also offer to clients with cash flow problems. Overdraft loans don’t have the stigma that comes with payday loans, but they are also short-term loans with high interest rates. In fact, they can often be significantly more expensive than payday loans. According to a study by the Consumer Financial Protection Bureau (CFPB), banks rely heavily on these fees, which account for up to two-thirds of their fee revenue.
How do payday lenders operate?
Payday lenders will offer a loan in exchange for a post-dated check, normally scheduled for the time of your next payday — hence the name payday lenders. The check you write will include the cost of the loan plus a finance charge, which reflects the agreed-upon APR. For example, you want a loan of $200. You make an agreement with a payday lender for a one-month repayment schedule at 300% APR. You then write a check for one month from now for $250 — which is the initial loan amount plus the finance charge.
While state laws normally set the maximum APR a lender can charge below 50%, payday lenders are often granted exceptions allowing APRs up to 400%. Special provisions by state governments make these high APRs legal.
Payday lenders must also follow standard credit application procedures. These lenders are legally registered with the government and will ask for personal information, proof of employment, and proof of income. In some cases, they will base the loan amount on the borrower’s income and credit history.
Are payday lenders dangerous?
Although payday lenders are superficially similar to loan sharks (both offer short-term loans with high interest rates, for example), the two types of lenders differ a great deal. One point in payday lenders’ favor is that they are not banks charging overdraft fees. It’s worth remembering that overdraft fees charged by banks can have even higher interest rates (and even shorter terms) than payday loans.
Unlike loan sharks, payday lenders don’t resort to violence if you do not repay the loan. They can’t call the loan before the scheduled repayment date, either. Because these loans are legal, the worst risks posed by loan sharks do not apply.
Approach payday loans with caution
More often than not, payday loans will not help your financial well-being. Learn more here about the history and use of payday lending to help you decide if a payday loan is a wise decision for you and your finances.
Tips for spotting loan sharks
Loan sharks will never identify themselves as “loan sharks,” and they will likely come across as trustworthy, making them difficult to spot. Here are some helpful signs for identifying a potential loan shark:
- Cash loans. Loan sharks will almost always offer cash loans, which are unregistered and difficult to track.
- Lack of paperwork. Paperwork adds an element of legality, which loan sharks want to avoid. When taking out a loan, you should always ask for a signed agreement and a payment record.
- Requesting possessions as ‘security.’ Loan sharks may ask for important possessions, like a passport or credit card. These possessions act as an illegal form of collateral to hold you accountable for repaying the loan.
- Unclear loan terms. Loan sharks try to take advantage of you and confuse you as much as possible. Thus, they may offer unclear information as to the terms of the loan, such as the repayment schedule or interest rate. If you work with an established lender, the terms of the loan will always be clear and easily accessible.
- A loan from someone you just met or who approached you. An established lender will rarely reach out to you to arrange a loan. If someone you just met offers you a loan, that’s a good sign you’re dealing with a loan shark.
Do loan sharks still exist?
Despite federal regulations and state laws, loan sharks continue to exist, especially in low-income and under-banked neighborhoods. Loan sharks are often members of crime groups. Loan sharks will prey on individuals who are unable to secure a traditional loan with an established lender, such as a bank.
How can you tell if someone is a loan shark?
It is not always possible to immediately tell if someone is a loan shark. The following are some possible signs:
- A loan offered in cash
- A lack of paperwork
- A loan with unclear terms, such as no stated interest rate or repayment schedule
- Threatening and violent behavior
- A loan offered by someone you just recently met
- Terms requiring you to surrender important possessions as “security”
- Loan sharks are dangerous and illegal. You should never engage in business with a loan shark. Instead, look into securing a personal loan. Even if you can’t land a personal loan, stick with legal financing options and appeals to friends and families.
- Loan sharks will offer you a cash loan with a high interest rate and a short repayment schedule. You will likely not be able to pay back this loan. If you fail to pay it back on demand, a loan shark may resort to violence to make you do so.
- Payday lenders also offer short-term high-interest loans (as do banks who charge overdraft fees) but operate legally.
View Article Sources
- CFPB Research Shows Banks’ Deep Dependence on Overdraft Fees — CFPB
- Charles Geisst — Manhattan College
- Defending the Undefendable by Walter Block — Mises Institute
- Loan Sharks: The Birth of Predatory Lending — Brookings Institution Press
The author, Charles Geisst, is Ambassador Charles A. Gargano Professor of Finance at Manhattan College (as of March 2022)
- Loan Sharks Sentenced — Federal Bureau of Investigation (FBI)
- Predatory Installment Lending in the States: 2020 — National Consumer Law Center (NCLC)
- State Rate Caps for $500 and $2,000 Loans: July 2021 — NCLC
- Walter Block — Loyola University of New Orleans College of Business
- Best Personal Loans — SuperMoney
- Is Payday Lending Evil? — SuperMoney
- Personal Loans: Reviews & Comparisons — SuperMoney
- The Ultimate Guide to Credit Reports — SuperMoney