Beware of Loan Sharks

Desperate situations often make people do desperate things. This certainly holds true when it comes to money problems. Loan sharking is a term used for the practice of lending money to cash-strapped individuals who have no other means of obtaining credit and then charging them extremely high and usually illegal rates of interest. The new decade has arrived and brought with it an economic slowdown and high unemployment not seen since the Great Depression. This translates to more and more frantic consumers needing cash; thereby increasing the chances of their being victimized by loan sharks. Learn how to protect yourself and avoid this dangerous financial activity.

History of Loan Sharking

Loan sharks make huge profits by lending money to individuals who can't qualify for a traditional loan through a bank or credit union. Loan sharks are sometimes referred to as shylocks, named after a Shakespearian character in the "Merchant of Venice". (Shylock actually wants as security for the loan "a pound of flesh"- a costly sum, to be sure.) They present themselves as well-meaning lenders who want to help the borrower get out of a tight spot. Anyone who is desperate for cash can fall victim to these predatory lenders- single parents, illegal immigrants, compulsive gamblers, white-collar executives. No one is immune from the loan sharking ploy.

For most people, loan sharking is synonymous with organized crime and gangsters. It's true that it is a very lucrative business for criminals and is a major source of income for the various crime families. One investigation reported that mobsters charged different interest rates depending on what city they were operating in. New York loan sharks sometimes netted a 3000% annual interest rate while Dallas gangsters were somewhat more forgiving in charging only 585%! Both of these interest rates were applied to loans that were given to people living in ghettos. This is further evidence of how loan sharks prey on people who are less educated, have low income, and may be suffering from drug and alcohol problems.

The money for loan sharking would normally come down from the top of the crime family. The boss would loan it to his lieutenants who would then loan it to the lower ranking members of the family. These would be the people who would make the loans to common, everyday people and would also enforce payment. Threats of violence directed either at the borrower or his family would be the collateral for the loan. The misconception that delinquent borrowers were killed if they didn't pay up is just that- a misconception. Dead people can't repay their debts. Sometimes a person would be roughed up as an example to other borrowers who were considering defaulting on a loan. Most people would find the money to repay the loan by whatever means possible- lying, cheating, or stealing.

Modern Day Loan Sharking

While there is no actual legal definition of predatory lending, there are common practices which are used in unethical lending agreements. Predatory lenders typically use some or all of these tactics: give the borrower unfair loan terms, charge hidden fees, use confusing language in the contract, or employ high-pressure sales methods. Anyone can fall victim to these predatory lenders but they normally target certain segments of the population. These include the elderly, minorities, consumers with poor credit, and low- educated and low-income people. These unscrupulous lenders thrive on people who live way beyond their means and may already be in a desperate financial situation.

Many of the non-traditional loan services offered to consumers today have a lot in common with those given by the gangster loan shark. Each state dictates the maximum amount that consumers can be charged for a loan, but lenders are allowed to charge "service fees". Payday loan companies provide immediate cash funds to a borrower by simply requiring a post-dated check (normally one or two weeks or the borrower's next payday) for the amount of the loan plus a hefty fee. Some fees calculate to 400% APR. The borrower then realizes he can't fully repay the loan in the time period agreed to and has to renew the loan with another fee added on. So the cycle of debt begins.

Title loans are also an example of predatory lending popular with many consumers today. People who own their automobile outright can bring their title, along with an extra set of keys, to one of these title loan companies. They can then borrow up to 50% of the car's value and receive the funds in immediate cash. The interest rates are usually very high with these loans and if the borrower defaults on the loan payments, the title company is within its legal right to repossess the car and sell it for an even greater profit. All in all, it's a "win-win" situation for the loan company and a "lose-lose" proposition for the borrower.

With the rate of foreclosures in the housing market greatly increasing over the past few years and still continuing to climb, the number of consumers who have been tricked out of their homes by predatory lenders is sadly increasing, also. These lenders aggressively market home-equity loans and credit card balance transfers to already financially troubled individuals who see these opportunities as a chance to buy more "things" or take that long-delayed dream vacation. Unfortunately, with a second mortgage loan, if the borrower ends up not being able to make the payments, the lender has a right to foreclose on the house.

Home improvement scams also target the most vulnerable group of consumers - the elderly. Older people who have lived in their homes for many years have build up a good amount of equity in their property. These companies employ contractors who offer to make all sorts of repairs and improvements to the home and even arrange "easy" financing for the unsuspecting homeowner. More often than not, the older borrower doesn't fully read or understand the contract and ends up signing a second mortgage type loan with a high interest rate. When the individual falls behind in the payments, the home can be foreclosed upon.

These fraudulent and shady businesses can only succeed when consumers are uneducated and unaware of the facts. Don't be a victim! By knowing and understanding the tactics used by these lenders, you can avoid even more financial problems and heartache.