How to spot predatory lenders
- Loan sharks are illegal lenders, often part of organized crime, who use threats and violence to get their money back from borrowers.
- Although loan sharks are less common with a decline in organized crime, vulnerable people are still victims of robbery loans.
- If borrowing money from loved ones isn’t an option, consider secured credit cards or second-chance banking as an alternative.
As the name suggests, loan sharks prey on vulnerable people who have no other options. They are usually associated with organized crime, which is becoming more common on TV than on the streets.
However, these vulnerable borrowers still exist. Over time, loan sharks have evolved into a new, technically legal form of lending to take advantage of these people: predatory lenders.
What is a loan shark?
A loan shark is a type of predatory lender, often an element of a larger criminal organization that lends money to outside borrowers. These loans often carry high interest rates, usually above the state legal maximum. Repayment is usually enforced with threats and the use of force.
Loan shark victims are typically vulnerable people who are desperate for cash right away. They either don’t have time to wait for loan approval or they don’t qualify for any loan. Loan sharks operate locally, so a victim is usually “someone in the neighborhood who knows someone who has the money on the street,” says Jeffrey Cramer, a senior executive at signpost solutions and former New York City Attorney. “Loan sharks don’t advertise. So it’s mostly word of mouth.”
That’s how loan sharks work
Most loan sharks offer smaller, short-term loans. “We’re not talking about a mortgage on a house or anything. It’s usually several hundred, several thousand dollars, money that they owe right now,” says Cramer. This loan comes with high interest rates that are usually insurmountable for the people who usually need to look for an alternative financial service.
How to find a loan shark
Knowing where to find loan sharks is important to avoid them altogether.
Fortunately, you’re unlikely to encounter a loan shark in the first place because they’ve largely fizzled out with the decline in organized crime. Cramer also says that most people who borrow from loan sharks know what they’re getting into but have no alternative, so you don’t accidentally bump into a loan shark.
However, you could quickly find yourself in a similar situation if you take out a loan with a high interest rate. “The concept of a loan shark has been built into these, let’s call them, predatory lending companies,” says Cramer. These predatory loans often disregard the borrower’s ability to repay. “They won’t break your legs, it’s all done under the paint of the law. They’ll garnish wages; they’ll send a debt collector.”
Alternatives to robbery loans
While loan sharks are largely a thing of the past, their potential victims are still very much present. A Morning Consult 2021 survey found that 10% of American adults are unbanked — meaning they don’t have a checking or savings account — and 25% are unbanked — meaning they have a savings or checking account but do have one within a year of responding to the survey alternative financial service used.
These households do not have access to financial institutions for a variety of reasons – they don’t trust financial institutions, they are undocumented, they cannot qualify due to previous credit failures. A large portion of this group simply cannot afford the fees involved or the minimum deposit requirements. “If you can go to a bank or borrow money with a credit card, it’s infinitely cheaper,” says Jack Miller, strategic finance advisor at Real Estate Bees and founder of Gelt Financial, LLC. “But there is a large part of the population that is just underserved.”
Instead of turning to financial institutions, these borrowers turn to alternative lending companies with high interest rates. Payday loans are a good example. Also known as cash advance loans, these loans give borrowers instant access to small amounts of money — typically $500 or less — with high interest rates. Repayment is made on the next payday of the borrower.
These loans can be attractive to struggling borrowers because they do not take into account the borrower’s ability to repay the loan. However, this rate can quickly become a problem if it turns out that the borrower does not have the funds to repay the lender.
Miller says the best option for the unbanked is to borrow from a loved one, either a family member or a friend. Of course, this may not be an option for everyone because “in a lot of communities, the friends and families don’t have that money,” Miller says. If that’s the case, here are some alternatives:
Second chance banking: Banks often offer a stripped-down version of a checking account for people with complicated credit histories. The sign-up process typically skips the credit check, but comes with some caveats. For example, people with these bank accounts typically don’t have access to a debit card to avoid overdraft fees. They also usually come with lower monthly fees and lower minimum balances.
Secured Credit Cards: Another option for those with a checkered credit history could be a secured credit card. These are credit cards backed by a security deposit that you leave when you open the card. These credit cards often overlook credit errors or the lack of a credit history. The minimum security deposit is usually around $200 depending on the credit card, but you can get it back if you close the credit card.
Not only do they offer a line of credit and the ability to rebuild your balance, they also offer lower APRs than unsecured credit cards because the debt is already covered by that deposit.
These options don’t directly solve the US underbanking problem, but they’re a start. “You really have to take every little step you can to push her in the right direction,” Miller says.