How to Spot Predatory Lenders

  • Loan sharks are illegal lenders, often part of organized crime, who threaten and use violence to get their money back from borrowers.
  • Though loan sharks are less prevalent with a decline in organized crime, vulnerable people still fall victim to predatory loans.
  • If borrowing money from loved ones isn’t an option, you can look at secured credit cards or second-chance banking as an alternative.

As the name would suggest, loan sharks prey on vulnerable people in need of money with no other options. They’re usually associated with organized crime, which has become increasingly more common on television than 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 loaners.

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 borrowers outside the law. These loans often come with high interest rates, usually beyond the legal limit outlined by state law. Repayment is usually enforced with threats and use of violence.

Loan shark victims are usually vulnerable people who are desperate for cash immediately. They either don’t have time to wait for a loan to get approved, or they can’t qualify for any sort of loan. Loan sharks operate locally, so a victim is usually “somebody in the neighborhood who knows somebody who has the money on the street,” says Jeffrey Cramer, a senior managing director of Guidepost Solutions and former New York City prosecutor. “Loan sharks don’t advertise. So it’s usually word of mouth.”

How loan sharks work

Most loan sharks will offer smaller, short-term loans. “We’re not talking mortgage for a house or anything. Usually, it’s several hundred, several thousands of dollars, money that they may owe right now,” Cramer says. This loan comes with high interest rates that are usually insurmountable for the people who usually need to seek out an alternative financial service.

How to find a loan shark

It’s important to know where to find loan sharks — in order to avoid them altogether.

Luckily, you’re unlikely to encounter a loan shark primarily 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 don’t have an alternative, so you won’t accidentally stumble into a loan shark.

However, you could quickly find yourself in a similar situation if you take up a loan with a high interest rate. “The concept of a loan shark has been incorporated into these, let’s call them predatory loan companies,” Cramer says. These predatory loans will often disregard the borrower’s ability to repay. “They’re not going to break your legs, it’s all done under the color of law. They’ll garnish wages; they’ll send a debt collector.”

Alternatives to predatory lending

Loan sharks might be largely a thing of the past, but their would-be victims are still very present. a 2021 survey from Morning Consult found that 10% of US adults are unbanked — meaning they don’t have a checking or savings account — and 25% are underbanked — meaning they have a savings or checking account, but used an alternative financial service within a year of answering the survey.

These households don’t have access to financial institutions for various reasons — they don’t trust financial institutions, they’re undocumented, they can’t qualify because of past credit mistakes. A large segment of this group simply can’t afford the associated fees or the minimum deposit requirements. “If you can go to a bank, or borrow on a credit card, it’s infinitely cheaper,” says Jack Miller, a strategic financing advisor at Real Estate Bees and founder of Gelt Financial, LLC† “But there’s a big set of the population that is just underbanked.”

Instead of turning to financial institutions, these borrowers go to alternative loan companies with high interest rates. payday loans are a good example. These loans, also known as a cash advance loan, give borrowers access to small amounts of money immediately — usually $500 or less — with high interest rates. Repayment is due on the borrower’s next payday.

These loans may be appealing for struggling borrowers because they don’t take into consideration the borrower’s ability to repay the loan. But that interest rate can quickly become a problem if it turns out the borrower doesn’t have the funds to repay the lender.

Miller says that the best option for unbanked people is to borrow from a loved one, either a family member or friend. Of course this might not be an option for everyone because “in a lot of communities, you know, the friends and families don’t have that money,” Miller says. If that’s the case, here are some alternatives:

Second chance bankingBanks will often offer a pared-back version of a checking account for people with a complicated credit history. The sign-up process usually skips the credit check but comes with some limitations. For example, people with these bank accounts usually don’t have access to a debit card to prevent overdraft fees. They also usually come with lower monthly fees and lower minimum balances.

Secure credit cardsAnother option for people with a checked credit history might be a secured credit card. These are credit cards that are backed by a security deposit you make when you open the card. These credit cards often overlook credit mistakes or the lack of credit history. The minimum security deposit usually hovers at around $200 depending on the credit card, but you’ll be able to get this back when you close the credit card out.

Not only do they offer a line of credit and a chance to rebuild your credit, they also offer lower APRs than unsecured credit cards because the debt is already covered by that security deposit.

These options don’t outright solve the underbanked problem in the US, but they’re a start. “They really need to take whatever small steps they can to push them in that right direction,” Miller says.

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