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What Is a Loan Shark?

What Is a Loan Shark?
Sulaiman Abdur-Rahman
Sulaiman Abdur-RahmanUpdated February 9, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A loan shark is a person who lends money at an unlawfully high rate of interest or who threatens violence to collect debt payments. Loan sharks are predators who make extortionate extensions of credit to enrich themselves in violation of state or federal laws.Loan sharks typically charge annual percentage rates of interest exceeding 36% APR and may have a reputation of punishing victims who fail to comply with their extortion tactics. Below we describe how a loan shark works and explain the loan shark definition.

Loan Shark Definition

What are loan sharks and how do you define them? The loan shark definition generally covers any person who makes or conspires to make an extortionate extension of credit.Some of the U.S. states have criminal laws specifically defining loan sharks as people who lend money at an unlawfully high rate of interest or who threaten violence to collect debt payments.

Are Predatory Lenders and Loan Sharks the Same Thing?

Loan sharks are predatory lenders, but predatory lenders are not necessarily loan sharks. What is a loan shark? Some of the U.S. states have criminal laws specifically defining loan sharks as people who lend money at an unlawfully high rate of interest or who threaten violence to collect debt payments.Predatory lenders can be legitimate financial institutions that take advantage of unsuspecting borrowers by concealing the true nature of their lending products. These lenders may persuade consumers to purchase extra services when opening a credit account.Predatory lenders do not necessarily use extortion and other loan sharking tactics, but they may embrace aggressive sales tactics or deception to manipulate consumers. Loan sharking relies upon coercion, while predatory lending relies upon unfair salesmanship.Loan sharks may have zero tolerance for delinquent borrowers, while predatory lenders may overlook a borrower’s ability to pay if the borrower offers or pledges collateral. Avoiding loan sharks and predatory lenders may help you avoid personal loan scams.

How Does a Loan Shark Work?

A loan shark works by offering financing to people who need quick cash or capital. The loan shark may offer financing at unlawfully high rates of interest and may threaten violence to coerce borrowers into accepting and complying with illegal terms and conditions.Loan sharks may target consumers who lack access to legitimate creditors. These illegitimate lenders may develop a reputation for violence that helps them enforce their extortionate extensions of credit. Loan sharks may start off friendly when disbursing funds and then become ruthless if borrowers fail to meet their repayment demands.

Example of a Loan Shark

Here are some examples of a loan shark:
  • A private lender who threatens violence to collect a debt
  • A predatory lender who charges excessive rates of interest
  • An organized crime boss who makes or finances extortionate extensions of credit

Is Working With a Loan Shark Bad?

Working with a loan shark is generally a bad idea. Loan sharks are illegitimate lenders who rely upon illegal tactics for financial gain. Loan sharking is generally unlawful under federal and state laws against extortionate debt collection and criminal usury. Lenders are prohibited from charging excessive rates of interest under usury laws.Loan sharks often have a reputation for violence and may threaten or harm borrowers who fail to pay their debts. Even if you’re willing and able to meet the ruthless demands of a loan shark, the interest you pay would be supporting an illicit practice. Loan sharks are not legitimate creditors.

Can Loan Sharks Threaten You?

It’s illegal for lenders to threaten you with violence. Loan sharks, however, don’t necessarily play by the rules. Loan sharks are illegitimate lenders who make or finance extortionate extensions of credit. Borrowing money from a loan shark is generally a bad idea, especially because the loan shark might threaten you if you don’t satisfy the loan shark’s extortionate demands.

Tips for Spotting a Loan Shark

Below we highlight several tips for spotting a loan shark:

Check for Lender’s License

A legitimate lender in the United States generally needs a charter or license issued by a state or federal regulatory agency. Checking whether a lender has a legitimate lending license can help you spot a loan shark. That’s because loan sharks may finance extortionate extensions of credit without possessing a proper license.

Check for Financial Disclosures

Lenders of consumer loans generally have to disclose the terms and conditions of their consumer lending products. Checking whether a lender discloses your APR can help you spot a loan shark. That’s because loan sharks may offer extortionate extensions of credit without disclosing their unlawful terms upfront.

Check Lender Underwriting Standards

Legitimate lenders generally have basic underwriting standards in which personal loan approval is not guaranteed. A borrower generally needs proof of identity and proof of income to qualify for a consumer loan.Checking whether a lender has basic underwriting standards can help you spot a loan shark. That’s because loan sharks may provide financing without verifying a borrower’s identity or income.

Tips for Avoiding a Loan Shark

Here are some tips for avoiding a loan shark:

Borrow From Legitimate Lenders

One way to avoid loan sharks is by borrowing money from legitimate and trustworthy sources. Loan sharks are illegitimate lenders who don’t play by the rules. Loan sharks may threaten violence to collect a debt, and they may charge excessive rates of interest.

Seek Loan Preapproval

You may avoid loan sharks by seeking personal loan preapproval from a bank, credit union, or legitimate private lender. Getting preapproved for a loan may help you understand whether a lender has basic underwriting standards and whether a lender charges lawful rates of interest.

Shop Around for Financing

Another way you may avoid loan sharks is by shopping around and comparing personal loan offers. Comparing personal loans interest rates and choosing a loan offer that’s right for you may prevent you from accepting extortionate extensions of credit.

Alternatives to Borrowing from a Loan Shark

You may consider the following ways of borrowing money:

Personal Loans

You may take out personal loans for quick cash. Personal loans provide borrowers with a lump sum of money and payment schedule for repaying the loan. They can be secured with collateral or unsecured, and borrowers can spend the funds on almost any personal expense.There are certain advantages and disadvantages of a personal loan. These consumer lending products can help you build credit, but personal loans in some cases may also carry annual interest rates up to 35.99%. Borrowers are expected to make on-time monthly payments over the life of the loan.A bank, credit union, and private lender may consider a personal loan account in default once a borrower fails to make a monthly payment by its due date. Lenders may accept late payments to cure a default on a personal loan, unlike loan sharks who may retaliate with violence.

Credit Cards

Consumers can use credit cards to pay for goods and services on open-end credit. This revolving credit provides flexibility in managing your credit card balances each billing cycle.You can apply for credit card accounts through a licensed bank or credit union. Every credit card account has a predetermined credit limit capping how much you can charge on the card. Cardholders are expected to repay their credit card debts over time and can make monthly payments that meet or exceed the minimum payment due.You can generally avoid paying interest on credit card purchases by paying your statement balance in full each billing cycle.

Family Loans

Consumers may borrow money from family members. A family member may be willing to loan you a lump sum of money without charging you interest.Asking relatives for family loans can help you meet planned or unplanned expenses, but failing to repay them back in full could strain your relationship with them.Some relatives may offer financial assistance without any expectation of repayment, but other family members may charge interest and demand repayment in full.

Personal Savings

Consumers with available personal savings may consider using those funds instead of borrowing from a lender or creditor. Any money you have deposited in a checking or savings account can be withdrawn and spent as you see fit.A savings and interest-bearing checking account can allow you to earn interest payments on any money you’ve deposited into your bank accounts. Dipping into these savings can help you cover planned or unplanned expenses.Using your personal savings to cover major expenses doesn’t increase your debt-to-income ratio and doesn’t require a hard pull inquiry into your credit report. Some savings accounts, however, may place limits on the number of withdrawals or transactions you can make during any monthly statement cycle.Recommended: 10 Different Types of Bank Accounts

The Takeaway

Loan sharking and predatory lending are discredited forms of financing that may violate state and federal laws in some cases. A 2006 federal law, the Military Lending Act, bans creditors from giving members of the U.S. armed forces high-interest loans charging more than 36% APR. At least 18 states and the District of Columbia have similar APR caps that effectively ban payday loans.If you need financing, Lantern by SoFi can help you compare personal loans interest rates. Just provide basic information about yourself and the loan you need, and Lantern can guide you in the process to apply for a personal loan with the lender of your choice. Find online personal loans with Lantern.

Frequently Asked Questions

What is the definition of a loan shark?
What is the difference between predatory lending and loan sharks?
Can you take legal action on a loan shark?
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About the Author

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman

Sulaiman Abdur-Rahman writes about personal loans, auto loans, student loans, and other personal finance topics for Lantern. He’s the recipient of more than 10 journalism awards and served as a New Jersey Society of Professional Journalists board member. An alumnus of the Philadelphia-based Temple University, Abdur-Rahman is a strong advocate of the First Amendment and freedom of speech.
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