How to spot predatory lenders
- Loan sharks are illegal moneylenders, often part of organized crime, who threaten and use violence to recover their money from borrowers.
- Although loan sharks are less prevalent with a drop in organized crime, vulnerable people are still victims of predatory lending.
- If borrowing money from loved ones isn’t an option, you can consider secured credit cards or second-chance banking as an alternative.
As the name suggests, loan sharks prey on vulnerable people who are in need of money with no other options. They are usually associated with organized crime, which has become increasingly common on television than on the streets.
However, these vulnerable borrowers still exist. Over time, loan sharks 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 moneylender, often part of a larger criminal organization, who lends money to borrowers outside the law. These loans often come with high interest rates, usually beyond the legal limit set by state law. Reimbursement is usually enforced by threats and the use of violence.
Victims of loan sharks are usually vulnerable people who desperately need money immediately. Either they don’t have time to wait for a loan to be approved, or they can’t qualify for any type of loan. Loan sharks operate locally, so a victim is usually “someone in the neighborhood who knows someone with money on the street,” says Jeffrey Cramer, senior managing director of Guidepost Solutions and a former New York City attorney. “The loan sharks don’t advertise. So it’s usually word of mouth.”
How loan sharks work
Most loan sharks offer smaller, short-term loans. “We’re not talking about a mortgage for a house or anything. Usually it’s several hundred, several thousand dollars, money they may owe right now,” Cramer says. This loan comes with high interest rates which are usually insurmountable for people who usually need to look for an alternative financial service.
How to find a loan shark
It is important to know where to find loan sharks, in order to avoid them altogether.
Luckily, you’re unlikely to come across a loan shark, mostly because it’s largely collapsed with the decline of organized crime. Cramer also says that most people who borrow from loan sharks know what they’re getting into, but don’t have an alternative, so you won’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 loan shark concept has been baked into these companies, let’s call them predatory loan companies,” Cramer said. These predatory loans often do not take into account the repayment capacity of the borrower. “They’re not going to break your legs, it’s all done under the guise of the law. They’re going to garnish wages, they’re going to send in a debt collector.”
Alternatives to predatory lending
Loan sharks may be largely a thing of the past, but their potential victims are still very much around. A 2021 Morning Consult survey found that 10% of American adults are unbanked – meaning they don’t have a checking or savings account – and 25% are underbanked – meaning they don’t have a bank account. ‘have a savings account or checking account, but have used an alternative financial service within one year of completing the survey.
These households do not have access to financial institutions for various reasons – they do not trust financial institutions, they are undocumented, they cannot qualify due to past credit errors. A large portion of this group simply cannot afford the associated fees or minimum deposit requirements. “If you can go to a bank or borrow 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’s a large chunk of the population that’s just underbanked.”
Instead of turning to financial institutions, these borrowers turn to alternative lending companies with high interest rates. Payday loans are a good example. These loans, also known as cash advance loans, give borrowers immediate access to small amounts of money – typically $500 or less – with high interest rates. Repayment is due on the borrower’s next payday.
These loans can be attractive to distressed borrowers because they do not take into account the borrower’s ability to repay the loan. But this interest rate can quickly become a problem if 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, whether it’s a family member or friend. Of course, that might not be an option for everyone because “in a lot of communities, you know, friends and families don’t have that money,” Miller says. If so, here are some alternatives:
Second Chance Bank: Banks often offer a lighter version of a checking account for people with complicated credit histories. The registration process usually skips the credit check, but has some limitations. For example, people with these bank accounts usually do not 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 people with verified credit history might be a secured credit card. These are credit cards that are secured by a security deposit that you make when you open the card. These credit cards often overlook credit errors or lack of credit history. The minimum security deposit usually hovers around $200 depending on the credit card, but you can get it back when you close the credit card.
Not only do they offer a line of credit and a chance to rebuild your credit, but they also offer lower APRs than unsecured credit cards because the debt is already covered by that security deposit.
These options do not outright solve the underbanking problem in the United States, but they are a start. “They really need to take every little step they can to push them in the right direction,” Miller said.