Loan sharks get their name from the predatory sharks of the sea, only they set their sights on borrowers in desperate need of money instead of schools of fish. Loan sharks often use threats of violence (and, in some cases, actual violence) to intimidate borrowers into paying back their loans — often at criminally high interest rates.
Loan sharks are illegitimate lenders, and even if you’re in serious and immediate need of cash, there are other options available to you.
Loan Shark Definition
So what is a loan shark? A loan shark is a person who loans money at unlawfully high interest rates and may use intimidation, primarily threats of violence, to ensure borrowers repay their debts. In some cases, a loan shark may be connected to a criminal organization or might at least imply this to intimidate borrowers.
People who borrow from loan sharks often believe they have no other options, and in fact, loan sharks might work hard to create that illusion. By lending without conducting background checks and reviewing credit reports, loan sharks also make it easier for borrowers to get money from them rather than through traditional channels.
Recommended: Guide to Financial Hardship Loans
Are Loan Sharks Illegal?
Loan sharks who use threats of violence or charge unlawfully high interest rates are breaking the law and can face criminal charges.
Though it varies by state, there are laws limiting how much interest a lender can charge on various types of loans. The maximum interest rate is called the usury interest rate — and loan sharks, by definition, charge rates higher than this.
Lenders should be licensed and, when legitimate, offer financial disclosures and have underwriting standards. Illegitimate lenders like loan sharks operate outside these requirements.
How Does a Loan Shark Work?
Loan sharks have access to a large amount of capital to offer loans to borrowers who feel like they have no other options. Rather than running credit checks and calculating a fair interest rate within legal limits based on a person’s financial history, loan sharks offer money with the threat of violence to the borrower — and their family — as an assurance that the debt will be repaid.
While we often think of loan sharks as being seedy individuals in low-lit, smoke-filled back rooms (thanks, Hollywood), in reality, a loan shark could be any individual who uses threats and intimidation to collect a debt. What’s more, any predatory lenders who charge interest rates above the legal limit are also considered loan sharks.
What Can I Do About a Loan Shark Debt?
If you have loan shark debt, the lender has no legal right to your money. They did not follow the law in lending to you, so they cannot use the law (i.e., take you to court) to ensure you pay them back.
However, they may threaten violence if you don’t pay up. And in some cases, they could follow through on that violence.
If you are concerned about your and your family’s safety, you can contact the police. Loan sharks can face both civil action complaints and criminal prosecution.
Loan Sharks vs. Predatory Lenders
A loan shark is a type of predatory lender, but not every predatory lender is a loan shark. It’s the old “all squares are rectangles, but not all rectangles are squares” lesson.
So what is predatory lending? Predatory lending broadly refers to any type of lending practice that misleads consumers to take out loans they can’t afford, often through questionable and aggressive advertising and sales tactics. Those loans are often high in fees and interest.
Unlike loan sharks, some predatory lenders — including actual financial institutions — technically operate within the law. Instead of charging unlawful interest rates, they may pile on fees, build balloon payments into a loan, convince you to purchase unnecessary products or services, or pressure less educated consumers to refinance their homes, even when it’s not in their best interest.
These lenders often intentionally target underbanked demographics and communities where there’s less access to alternative credit access. They can do this with targeted mailers, TV ads, phone calls — you name it.
Common examples of predatory loans include:
• Payday loans
• Auto title loans
• Subprime personal loans
And, of course, loans from loan sharks.
Loan Shark Alternatives
No matter how dire your financial situation is, taking money from a loan shark is generally considered a bad idea. Loan sharks typically operate outside of the law and often use threats of violence to ensure borrowers pay back their loans with very high interest.
If you’re in need of money, consider your alternatives. Here are some to keep in mind:
Friends and Family
Borrowing money from friends and family is never easy, but if it means avoiding a loan shark, it may be worth asking your loved ones for help. Be prepared for them to say no, and always thank them for listening.
Personal Loan
If you can’t borrow the money from a loved one — or aren’t comfortable asking — a personal loan may be your next-best option. Depending on the lender, you can get personal loans for as little as $500 or $1,000 or as much as $100,000 or more.
Personal loan rates and terms vary. You may be more likely to get approved for a better loan if you have a strong credit score. However, if you have poor credit (more common for borrowers seeking out loan sharks), you might be stuck with personal loan lenders who charge high fees and average APRs for smaller loan amounts.
The average personal loan interest rate varies by credit score, but other factors, such as debt-to-income ratio and your employment status, can impact the APR you’re offered.
Recommended: Is There a Minimum Credit Score for Getting a Personal Loan?
Credit Card
If you have access to a credit card with a high enough credit limit — and the person or company you owe accepts credit card payments — it’s better to pay with plastic than a predatory loan.
Sure, credit card APRs can be high, and you might risk slipping deeper into credit card debt. But credit card issuers are bound by strict state usury interest rates that, theoretically, should be lower than the illegal limit set by a loan shark.
Payday Loan
Payday loans are a common last resort for people in a bind and one you may want to think twice about. While these loans often don’t require credit checks and can get you cash fast, they often come with high interest rates and other potential fees that can make them exorbitantly expensive. In fact, payday lenders often earn exceptions from state governments that allow them to charge extremely high annual interest rates (sometimes up to 400%) without breaking the law. (In that way, they’re technically different from loan sharks.)
The Takeaway
Loan sharks take advantage of borrowers who feel they’re at the end of their rope, offering loans with unlawfully high interest rates and often using threats of violence to ensure borrowers pay up. Borrowers looking for a way out may feel like they have nowhere else to turn, but there are options such as personal loans, loans from loved ones, and even credit cards.
Instead of seeking out a loan shark, consider a SoFi personal loan. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
FAQ
What is a loan shark?
A loan shark is someone who lends money to desperate borrowers at exorbitantly high interest rates, well above the legal limits. Loan sharks don’t run credit checks, which can make them appealing to borrowers with bad credit. In some cases, loan sharks may threaten — or occasionally use — violence to make sure borrowers repay their debts.
Why are loan sharks so bad?
Loan sharks are considered bad because they offer loans at unlawfully high interest rates — sometimes more than 400% — to borrowers who feel like they have no other option. They may also use threats of violence when collecting debt.
What are alternatives to loan sharks?
No matter how much money you need, there are alternatives to loan sharks that are worth exploring. Some options include asking family and friends for help, taking out a personal loan, paying with a credit card, or even taking out a payday loan, though the latter option has its own share of drawbacks.
Photo credit: iStock/Hammarby Studios
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