Introduction to Loan Sharks
Loan sharks are loans that are given at absurdly high-interest rates and under absurdly written conditions attached to the loans. Although it looks illegal, there are many types of organizations in this domain that act legally and under the control of law. The argument about the ability of such an organization to help the economy to the harm they do to the society is still pretty much under discussion. In this article, we will try to make a point about both sides of the arguments and will leave the conclusion to the reader to decide.
Examples of Loan Sharks
Let’s take an example to understand the Loan Sharks in a better manner.
How Much do they Charge?
Let us take an example of a normal banking system in the United States.
In general, there are two types of loans: Retail and Institutional. In retail loans, there are two ways to get a loan legally – Banks and PayDay loans. PayDay loans are the Loan Sharks this discussion is about.
The United States uses a credit rating system for retail loans. Depending on the credit score of a person, the loan rates change. A minimum rate is for around 4-5% with US National Bank. The source for the details is here. Now let us go and see how much an average PayDay loan charges. CNBS did a report on the interest rates for payday loans and the source can be found here. CNBS reports that the average loans cost as much as 10 times that of what credit card company’s charge, which themselves are quite high. In addition, at the highest, in some states, the loans reached an interest rate of 700%. On average, the interest rates are around 300%.
Examples of Companies
1 Hour Loan USA is a company that gives out loans and as the name suggests, in one hour. The conditions are simple, a citizen of the USA with more than 1000$ per month income can fill in the details and get his loan approved in one hour. Any banking institution, though legal, does not regulate these loans. If the person does not pay, the lender cannot use government bodies to take action against him. Such institutions exist only in about 25 of 50 states. The rest have regulated payday loans.
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Examples of Illegal Loan Sharks
To know more about loan sharks, we shall resort to a paper written by Robert Mayer with title Loan Sharks, Interest-Rate Caps and Deregulation. The paper can be found here. In this paper, he speaks about cases where there are loan sharks (lenders) who are associated with crime families. There are multiple cases where organized crime, who employed violence, or threat to act violently, for repayment of debt. Congress came in and regulated them later.
Why do People go to Loan Sharks?
Why do people go to a loan with higher interest and higher danger of threat? The question might look like it shouldn’t be happening, however, there are multiple other factors that come into play. Essentially, banks have a minimum amount that has to be borrowed for loans. And even for that amount, one has to go through a lengthy and strenuous process. One has to have all the required documents, which is one of the main reasons why people go to payday loans. The entire process is not worth the effort, especially when one does not have all the details required. The accessibility of an easy loaning system is the main reason why people resort to such loans. So, in conclusion, the reasons are
- The minimum loan amount for banks
- The credit report of the borrower
- And the hassle of the process
- The accessibility of institutions
Advantages and Disadvantages of Loan Sharks
The following are the advantages and disadvantages of loan sharks –
Advantages of Loan Sharks
Though the word might look like it is a very negative term, such loans actually have some uses. Especially because of the limitations of traditional loans.
- These loans make lending and borrowing easy, because of the reduction in a number of steps for the process flow.
- The ability of these loans to be available anywhere across the country makes it much more accessible for people.
- For people without a great credit score, payday loans might be the only way a loan might be possible.
Disadvantages of Loan Sharks:
- The payment cycles tend to be confusing. They try to predate on writing rules complicatedly and the ignorance of people.
- Some payday loans put weekly interest rates, some put annual and some days, such complicated interest rate calculations make it difficult for the borrower to accurately calculate the total amount.
- Payday loans are hard to pay off. In fact, sometimes, it almost becomes impossible to repay. There are multiple cases where people have failed to pay back and have been harassed and in some cases, violently.
- Since they don’t operate within the boundaries of government agencies, any legal complications cannot be handled with a generic legal system.
- Most of these loans are not reported to credit rating agencies. This makes the point of these loans moot. If the credit score of the borrower is not improved, there is no point in having taken loans.
Conclusion
Loan sharks are loans at an expensive cost, but they do come with their own benefits. Though the benefits do not overthrow the negatives, people choose to use it because some times it is the only way. There are multiple reports and studies that researched the implications of loan sharks on the rest of the economy. We have briefly discussed the implications of illegal and legal systems of such loans, how the government tried to regulate them. Even when the government tried to regulate them, the illegal ways still stand because of the accessibility of such loans. Opening the banking system and actually regulating will help them be more secure, rather than trying to shut them down entirely.
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