When Loan Sharks Attack!

Last updated on: August 16, 2011 at 9:28 am by Tim

When Loan Sharks Attack! 2011-08-16T09:28:16-05:00 Tim

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After watching a few episodes last week of Discovery’s Shark Week, I was surprised that the most infamous shark wasn’t highlighted – the loan shark. I guess the marine biologists don’t give much thought to loan sharks, but I can’t help but to tie things to a financial reference when possible.

With the advent of the credit card and lines of credit at local banks, loan sharks have lost popularity in the last 50 years, but they’re not extinct! We’ll look at how loan sharks have evolved, but first let’s take a look at the history of loan sharks and the practice of usury.

What is Usury?

Usury is a word used to describe the practice of charging excessively high (and often illegal) interest on loans. The practice of usury dates back to Biblical times and in the Old Testament, we find instructions for the Israelites on how they should handle money.

Exodus 22:25 – “If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest. (KJV) – If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.

Leviticus 25:37 – You must not lend him money at interest or sell him food at a profit.

Ezekiel 18:8 – He does not lend at usury or take excessive interest. He withholds his hand from doing wrong and judges fairly between man and man.

The Israelites were instructed never to borrow from anyone, but they could lend to foreigners. Interestingly, they were instructed never to lend to each other, which is a great topic to discuss in itself!

Modern Day Loan Sharks

Fast-forward to the 1800s and you’ll find that small loans were undesirable because of the stigma behind it. People were looked down upon if they had to borrow a small amount. Also, banks and other financial institutions stayed away from this form of lending, so those in need of a loan sought out private lenders who often provided loans at very high rates.

Since it was actually illegal to charge exorbitant rates for loans, the loan shark didn’t have any legal way to go after the borrower if they didn’t repay, so they would use other means to scare them into paying. To enforce contracts, these loan sharks used blackmailing and harassment, and violence was added with gangs of loan sharks in the 1900s.

As for today, states regulate the maximum rate at which a loan can be made, putting the loan shark of old on the endangered species list. However, as a way to bypass the rules to charging interest, payday loans, sub-prime lending, and non-standard consumer credit have found ways to provide the money advancement service for individuals in need of loans. Generally, the borrowers will have lower credit and limited resources to get a loan elsewhere, so they will use a borrowing service to advance a paycheck and pay a fee of 3% – 10%+ for the service.

Lending always seems to be evolving, but it’s interesting that there’ll always be a loan shark in some form – you just need to pay attention!

Shark Tip * If you don’t want to get bit by sharks, stay out of the water. i.e. make a budget and do your best to build an emergency fund!

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