Loan Shark: Definition, Example, Vs. Payday Lender

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.

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.

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.