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Loan Sharking: Perils and Alternatives

by: sahil | last updated: April 19, 2010
Category: Personal Finance | Tags: loan sharks, predatory lending, abusive lending, loans, short term loans, payday loans, paycheck advance

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Loan Sharking: Perils and Alternatives

A loan shark is a person or entity who offers unsecured loans, at very high interest rates, which are short term in nature. The targets of loan sharks are people in the low income class and those with bad or no credit rating. Loan sharks often employ illegal methods of collection including bodily injury threats and sometimes even murder. This industry started as a genuine one but faced criticism and suffered disrepute during the 1970’s due to its connections with organized crime.

Loan sharks are common in the U.K, China and in the United States. However, these loans may take the form of other types of loans in order to guise the crime. Payday loans are similar to loan sharking and are deemed as predatory in nature by the Department of Defense of the United States. Many states in the US prohibit or restrict the amount of interest charged and some states have outlawed payday loans completely.

A loan sharking scheme or scam works because the lender is able to trap the borrower in a cyclic debt trap. This means that usually when these loans are rolled over or extended, the lender charges unnecessary fees and the interest balloons to become higher than the actual amount owed. This happens because many debtors take out other loans in order to satisfy the previous one and the connivance between the lenders finally leads to the borrower’s financial ruin.

Loan sharking is not restricted to the United States and countries such as New Zealand are also facing problems due to such type of shady lending practices. The immigrants in New Zealand are usually the victims of loan sharking due to their illegal alien status or since they are very poor and illiterate to understand the terms and conditions of the loan. Countries such as Japan and the United Kingdom also face such problems and thousands of borrowers in the UK are under debt to loan sharks.

The best way to avoid loan sharks is to recognize and understand the interest rates and fees that are going to be charged. Moreover, there are other options such as title loans and credit card cash advances or borrowing from a family member or friend. It would be advisable to exhaust the above mentioned alternatives before choosing any kind of unsecured high interest loan.