Updated July 26, 2023
Definition of Loan Sharks
Loan sharks are loans given at absurdly high-interest rates and under absurdly written conditions attached to the loans. Although it looks illegal, many types of organizations in this domain act legally and under the control of the law.
The argument about the ability of such an organization to help the economy despite the harm they do to society is still pretty much under discussion. In this article, we will try to make a point about both sides of the argument and leave the reader to decide.
Examples of Loan Sharks
Let’s take an example to understand Loan Sharks in a better manner.
How Much do they Charge?
Let us take an example of a normal banking system in the United States.
In general, there are two types of loans: Retail and Institutional. There are two ways to get a loan in retail legally: Banks and PayDay loans. Payday loans are the Loan Sharks this discussion is about.
The United States uses a credit rating system for retail loans. Depending on the credit score of a person, the loan rates change. A minimum rate is around 4-5% with US National Bank. The source for the details is here. Now let us go and see how much an average PayDay loan charges. CNBS reported on the interest rates for payday loans, and the source can be found here. CNBS reports that the average loans cost as much as 10 times that of what credit card companies charge, which themselves are quite high. In addition, at the highest, in some states, the loans reached an interest rate of 700%. On average, the interest rates are around 300%.
Examples of Companies
1 Hour Loan USA is a company that gives out loans, as the name suggests, in one hour. The conditions are simple, a citizen of the USA with more than 1000$ per month income can fill in the details and get his loan approved in one hour. Any banking institution, though legal, does not regulate these loans. If the person does not pay, the lender cannot use government bodies to take action against him. Such institutions exist only in about 25 of 50 states. The rest have regulated payday loans.
Examples of Illegal Loan Sharks
To learn more about loan sharks, we shall resort to a paper by Robert Mayer titled Loan Sharks, Interest-Rate Caps, and Deregulation. The paper can be found here. In this paper, he discusses cases where loan sharks (lenders) are associated with crime families. There are multiple cases where organized crime employed violence or threat to act violently for repayment of debt. Congress came in and regulated them later.
Why do People go to Loan Sharks?
Why do people go for a loan with higher interest and higher danger of threat? The question might look like it shouldn’t be happening; however, multiple other factors come into play. Essentially, banks have a minimum amount to be borrowed for loans. And even for that amount, one has to go through a lengthy and strenuous process. One must have all the required documents, which is one of the main reasons people go for payday loans. The process is not worth the effort, especially when lacking the required details. The accessibility of an easy loaning system is why people resort to such loans. So, in conclusion, the reasons are
- The minimum loan amount for banks
- The credit report of the borrower
- And the hassle of the process
- The accessibility of institutions
Advantages and Disadvantages of Loan Sharks
The followings are the advantages and disadvantages of loan sharks.
Advantages of Loan Sharks
Though the word might look like a very negative term, such loans have some uses, especially because of the limitations of traditional loans.
- These loans make lending and borrowing easy because of the reduced number of steps for the process flow.
- The ability of these loans to be available anywhere across the country makes them much more accessible for people.
- For people without a great credit score, payday loans might be the only way a loan might be possible.
Disadvantages of Loan Sharks
- The payment cycles tend to be confusing. They try to predate on writing rules complicatedly and the ignorance of people.
- Some payday loans put weekly interest rates, some put annual, and some days, such complicated interest rate calculations make it difficult for the borrower to calculate the total amount accurately.
- Payday loans are hard to pay off. Sometimes, it almost becomes impossible to repay. There are multiple cases where people have failed to pay back and have been harassed and, in some cases, violently.
- Since they don’t operate within the boundaries of government agencies, any legal complications cannot be handled with a generic legal system.
- Most of these loans are not reported to credit rating agencies. This makes the point of these loans moot. If the borrower’s credit score is not improved, there is no point in having taken loans.
Conclusion
Loan sharks are loans expensive but come with their benefits. Though the benefits do not overthrow the negatives, people choose to use it because sometimes it is the only way. Some multiple reports and studies researched the implications of loan sharks on the rest of the economy. We have briefly discussed the implications of illegal and legal systems of such loans and how the government tried to regulate them. Even when the government tried to regulate them, the illegal ways still stood because of the accessibility of such loans. Opening and regulating the banking system will help them be more secure than trying to shut them down entirely.
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