Written by: Jon McDonald
Edited by: Austin Lang
Reviewed by: Ashley Fricker
Imagine if your son gets arrested and you can’t make bail. Or your partner comes clean about their gambling losses and now is in debt. And if you don’t make rent tomorrow, you’ll get evicted.
You might find yourself knocking on the door of someone who can get you cash, no questions asked, for a steep price. But suddenly that $5,000 loan has ballooned to you owing $10,000, and you never see an end in sight. This is what happens when you find yourself the victim of a loan shark.
A loan shark is an illegal, high-interest lender. Their victims work with them because they can offer money fast and off the books. Loan sharks typically charge exorbitant interest rates — well above what’s legal for a traditional lender — and may use intimidation to enforce payment.
Loan sharks are illegal lenders that offer extremely high-interest loans to vulnerable borrowers.
Loan sharks tend to prey on people who would not qualify for legitimate loans or don’t have the time to secure them. Their victims thus put up with insurmountable interest and, sometimes, the threat of violence should they not pay off their debts.
Financial emergencies can happen quickly, and getting the funds to handle them through a bank can seem impossible. Sometimes, you might be so desperate that you think the only places to turn for quick money are the ones that don’t follow established financial rules.
Even when it feels like loan sharks are the only option, believe me: They’re not. I’ll walk you through the possible consequences of using loan sharks and ways to keep yourself from getting bit.
How Loan Sharks Operate
You may be more familiar with loan sharks from old mobster movies than from real life, but they’re still very real today. In the United States, they were more common in the mid-20th century, when organized crime had more power.
Still, you can often find loan sharks in poorer communities, where their services can be advertised through word-of-mouth. They may be directly connected to other illegal industries, like the drug trade or sex work, or they may operate on their own.
Higher Interest Rates than the Law Allows
The most notable difference between loan sharks and legal lenders (with the exception of payday lenders) is that they charge extremely high rates, which may increase over time. Sometimes, these rates can reach 400% APR.
Different types of legal loans have different limits, but the highest standard credit card APR is 36%, and that’s sometimes a penalty rate. The rates loan sharks charge are highly illegal and well above the amount their victims can reasonably pay off.
How Loan Sharks Enforce Contracts
High interest rates mean that borrowers are frequently unable to pay their debts or unwilling when they find that their interest rate is much higher than they were led to believe. And because loan sharks lend money illegally, they can’t exactly send debt collection agencies after their borrowers or take them to court.
Instead, loan sharks use intimidation and occasionally violence to scare their victims into making payments.
To get people to pay up, loan sharks may:
- Damage their victims’ property
- Follow them around
- Physically assault them
Generally, their tactics don’t get to the point of physical violence — their reputation for it is enough to scare people into paying.
Because of their connections to organized crime, their victims are often too afraid to involve law enforcement.
Why Loan Sharks are Appealing
High interest rates and the threat of physical violence probably don’t make using a loan shark sound all that appealing. But for many people, they seem like the best option.
Some loan shark victims have poor credit. Loan sharks won’t conduct a credit check and will often be able to quickly secure a loan, which can appeal to folks who can’t work with a traditional lender.
Some people are simply underbanked in the first place and don’t know how to access the financial institutions that could give them a loan. One in 10 American adults don’t have a bank account. These people may think loan sharks are an easier option than working with the financial establishment.
Loan Sharks vs. Payday Lenders
There are quite a few similarities between loan sharks and payday lenders. Both charge extremely high interest rates and target lower-income people who are less likely to pay their loans back. But unlike loan sharks, payday lenders follow state lending regulations.
Payday lenders rely on short-term loan exemptions from usury laws, which generally cap interest rates. Because payday loans are generally designed to be paid back in full when their borrowers get their next paycheck, their short-term rate can be extremely high.
When borrowers don’t pay, the loan is often rolled over into another cycle, and the APR can add up to rates similar to those of loan sharks. But payday loan rollovers aren’t legal in every state.
Payday lenders are technically legitimate, so you usually don’t need to worry about getting your kneecaps broken by them. Still, there are much better options.
The Dangers of Borrowing from Loan Sharks
Taking out a loan from a loan shark is never a good idea. No matter how confident you are that you’ll come up with the money in time, there’s always the possibility that the loan shark will change your contract.
And let’s be honest: Poor financial situations seldom disappear overnight.
Significant Financial Impact
Many people, despite dire financial circumstances, believe that they’re just one interview, gig, or sale away from making it big. That may lead them to be confident that after borrowing with a high interest rate, they can easily pay off their debts. But most of the time, financial conditions don’t change that quickly.
If you’re in a position where you need to borrow a lot of money from a nontraditional source, you’re unlikely to quickly become financially secure. The most common consequence of borrowing from a loan shark is that you’ll find yourself in a cycle of debt that you may not be able to get out of.
High interest adds up fast. After a while, you may find yourself owing 10 times what you originally borrowed, even as you make payments. This is the kind of debt that can take over your life.
Personal Safety Risks
Extreme debt, in any form, is debilitating. It may feel like a cloud is hanging over you at all times. Any dreams for your life and future are colored by the money you don’t have.
When you borrow from a loan shark, the emotional toll of your debts is compounded by the fear your lender intentionally puts on you. You may be constantly looking over your shoulder, worried that the loan shark is going to use violence against you or your family.
Because loan sharks aren’t bound by financial rules, they can decide to change the terms of your agreement — or the consequences for not meeting their expectations — at any time. You’ll never feel safe from their whims.
Potential Legal Consequences
It’s important to note that borrowing from a loan shark is legal, while lending as a loan shark is not. If you’ve been victimized by a loan shark, know that you have a right to come forward to the authorities.
Loan sharks can be tried for usury, extortion, or racketeering, not to mention additional charges for any violence or harassment. Penalties for these crimes are usually fines, but they can include imprisonment, depending on the extent of the violation.
How to Protect Yourself from Loan Sharks
The easiest way to stay safe from loan sharks is obvious: Don’t get involved with them in the first place. Always borrow from traditional lenders.
But recognizing loan sharks is sometimes easier said than done. You may have found yourself in debt to an illegal lender without realizing the illegitimacy of their operation or turned to a loan shark thinking you had nowhere else to go.
Getting out of debt with a loan shark is difficult, but it is possible to protect yourself and your financial future. I’ll walk you through the ways to avoid working with a loan shark in the first place and what you should do if you realize you’re the victim of a high-interest lender.
Recognizing Lending Red Flags
Loan sharks are often tied to organized crime, so most people borrowing from them know they’re working with an illegal lender, they just don’t see another option. Still, there are some clear red flags that you should watch out for when choosing a reputable lender.
Most lenders will run a credit check before approving you, except for those offering payday loans or special second-chance personal loans. Even these lenders will require proof of income. Loan sharks, on the other hand, will seldom require proof of credit or your ability to pay your debts.
Any legitimate financial agreement will include a contract, but you may not get a paper document with the terms of your loan from a loan shark. Be wary of handshake deals.
The biggest loan-shark red flag — which also applies to payday lenders — is an astronomically high interest rate. If you aren’t sure what’s a reasonable APR for your debt, make sure to do your research before agreeing to any loan.
Seek Legal Advice
If you’re in debt to a loan shark, you need to remember that you’re the victim in the situation. You may think you’re destined to hand over your paycheck to your lender forever, but that doesn’t need to be the case. The rates that loan sharks charge their victims are illegal, and with the help of a lawyer, you shouldn’t have to pay.
Plenty of law firms around the United States specialize in consumer litigation. Find a law office in your area that works in consumer protection and see if you have a case.
For people who are struggling financially and feel left out of traditional institutions, getting a lawyer may feel out of reach. But many law offices will perform an initial phone consultation for free, so you won’t need to pay anything upfront.
Report Loan Sharks
If you work with a lawyer, they will likely help you go about reporting the loan shark to the authorities. But if you choose not to use a lawyer, you can still report the illegal activity.
File a complaint with the Federal Trade Commission (FTC) and the Federal Bureau of Investigation (FBI). Many usury laws are also specific state by state, so consider reaching out to your state financial regulators and state attorney general’s office.
Loan Sharks Could Cost You a Lot More than Money
Borrowing from a loan shark will usually mean paying back much more than your original loan. For people who need to work with an illegal lender to get money, quadrupling debt is a quick way to make financial problems a permanent fact of life.
Carrying debt is always stressful, no matter the type of debt. Whether you have student loans, car payments, credit card debt, or a mortgage, you’re going to feel the weight and responsibility of that debt, even when it’s a completely reasonable financial decision.
Even when loan sharks feel like your only option, there are traditional lending alternatives, such as payday alternative loans from credit unions.
But when you borrow from a loan shark, the natural anxiety that comes with borrowing money gets a whole lot worse. Now, you have to worry that your interest rate will randomly increase, with no rhyme or reason. You have to watch out for calls to your work and family, as well as the potential threat of violence.
You may feel like loan sharks are your only option, but they’re not. Look into personal loans for poor credit, payday alternative loans from a credit union, or even borrowing from a friend or family member.
And if you do find yourself owing money to some unsavory characters, think about reporting them. I know it’s scary, but remember: You’re the victim.
