Loan Sharks

Financial Dictionary -> Loans -> Loan Sharks

Using the services of a Loan Shark is usually a last resort for people who for whatever reason need money but have been turned down for a loan by their bank or other legal service. This might be because they already have very bad credit, are under a debt management program or need a ridiculously large sum of money, but have no feasible reason to do so. This is often because they are caught in something illegal. Gambling debts are very common in this situation.

A loan shark is somebody or a group of people (that often look and act very business like initially) who offer unsecured high interest loans and usually don't make any background checks or question what the money is for. They often have ties to other criminal activities and criminal syndicates like the mafia. Loan sharking can also be used as term for a loan that simply charges an illegally high interest rate.

Because they are illegal it is not safe to borrow from a loan shark. The money given to you may be laundered, counterfeit or from other illegal outlets and they may demand repayment much earlier than agreed. Due to the nature of the deal they commonly use violent force to ensure their money is paid back and if this is not possible it can have fatal consequences. Interest rates are usually astronomical and they can change them at will because they are obviously not governed by any legal institution.

Just because money being offered isn't from a bank does not automatically mean it is a loan shark service though. There are many other legal lenders that are officially recognized, but have no connection to any mainstream banks. These are often known as subprime lenders and primarily offer housing mortgages.

Although heavily criticized payday lenders are also not officially loan sharks, despite their high interest rates. They generally deal with people that need a quick influx of cash but can pay it back by their next paycheck. Sums never usually go over $1000. Payday loans can be compared to a bank overdraft where a business is allowed to go in to the red because it can be paid back once they get paid by their customers. There seems to be an increasing problem with pay day lenders that use the internet, because of the ease of use and lack of security.
Loan sharking often occurs when the borrower isn't fully aware of the organizations that can help them sort through their debts and frantically borrow more money in order to pay off current debts leading to a vicious cycle. There are many non profit organizations such as credit counselors that educate consumers about debt and help build repayment plans that are more feasible.

Loan sharking is now fairly uncommon in the US and UK, tending to take place more frequently overseas where law is less tight - although with the recent credit crunch it's possible that the activity has and may increase.