How to Spot Predatory Lenders

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  • Loan sharks are illegal lenders, often part of organized crime, who threaten and use violence to recover money from borrowers.
  • Although loan sharks are less prevalent with a decline in organized crime, vulnerable people still fall victim to predatory lending.
  • If borrowing money from loved ones isn’t an option, you may want to consider secured credit cards or second-chance banking as an alternative.

As the name suggests, loan sharks prey on vulnerable people who need money and have no other options. They are often associated with organized crime, which has become more common on television than on the streets.

However, these vulnerable borrowers still exist. Over time, loan sharks have evolved into a new form of technically legal lending to take advantage of these people: predatory lenders.

What is a usurer?

A loan shark is a type of predatory lender, often an element of a larger criminal organization, who lends money to outlaw borrowers. These loans often come with high interest rates, usually beyond the legal limit set by state law. Reimbursement is usually enforced with threats and use of violence.

The victims of loan sharks are often vulnerable people who are desperate for immediate cash. 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 often “someone in the neighborhood who knows someone who has the money on the street,” says Jeffrey Cramer, senior managing director of Signpost Solutions and former New York City prosecutor. “Loan sharks don’t advertise. Usually it’s word of mouth.”

How loan sharks work

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

How to find a loan shark

It is important to know where to find loan sharks, to avoid them altogether.

Fortunately, you’re unlikely to come across a loan shark mainly because they’ve largely faded away with the decline in organized crime. Cramer also says that most people who borrow from loan sharks know what they’re getting into, but they don’t have a choice, so you won’t accidentally stumble upon a loan shark.

However, you could quickly find yourself in a similar situation if you apply for a loan with a high interest rate. “The concept of a loan shark has been built into these, let’s call them predatory lending companies,” says Cramer. These predatory loans will often ignore the borrower’s ability to repay. “They are not going to break your legs, everything is done under the color of the law. They garnish your wages, they send you a collector.”

Alternatives to predatory lending

Loan sharks may be largely a thing of the past, but their potential victims are still very much around. AN Morning Consult Survey 2021 found that 10% of U.S. adults are unbanked, meaning they don’t have a checking or savings account, and 25% are unbanked, meaning they have a savings or checking account checks, but used an alternative financial service within a year of responding to 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 previous credit errors. A large segment 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 financial advisor at real estate bees and founder of Gelt Financial, LLC. “But there is a large group of the population that is underbanked.”

Instead of going 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, at high interest rates. The 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 that interest rate can quickly become a problem if it turns out that the borrower doesn’t have the funds to pay 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, this might not be an option for everyone because “in a lot of communities, friends and families don’t have that money,” says Miller. If that’s the case, here are some alternatives:

second chance banking: Banks often offer a stripped-down version of a checking account for people with difficult credit histories. The signup process generally bypasses the credit check, but it does have some limitations. For example, people with these bank accounts typically don’t have access to a debit card to avoid overdraft fees. They also usually come with lower monthly rates and lower minimum balances.

secured credit cards: Another option for people with a bad credit history could be a secured credit card. These are credit cards that are backed 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 is usually 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 the 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 completely solve the problem of underbanking in the US, but they are a start. “They really need to take whatever small steps they can to push them in the right direction,” says Miller.

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