Who is a Loan Shark ?
A loan shark is generally understood to be someone who lends small amounts of money for a short-term at a higher rate of charge or interest rate than is legally allowed. Further interpretation on this term also includes illegal methods of recovery of the money loaned if it were not returned in the time and manner agreed. This happens to include threats of violence and dispossession of other potentially valuable items the borrowers may own, making any verbal harassment by the lender probably the least of their worries.
The loan shark is an undesirable icon of economic turmoil generally among the lower-income group and is probably aptly described by those who seek their services as an indispensable evil. Though loan shark problems are made out to be endemic to developing countries, they are found everywhere in the world, only to a greater or lesser degree depending upon the overall socioeconomic conditions. In the UK, the Office of Fair Trade(OFT) reported in May 2010 that there were an estimated 165,000 households using the services of illegal moneylenders. Hence, bringing such activities under control – falling short of eradicating them – is of prime importance to the health of a nation.
Money lending from the early days that was based on tangible and measurable property values has essentially been taken over by banks and other financial institutions. In the case of the loan sharks who usually target minimum wage earners, a small difference between subsistence level income and their actual wages which enabled the borrower to have the surplus for making the repayments with interest was enough grounds for providing the loan. Of course with higher wages, potential borrowers became more of an ‘asset’ to them if their services were sought. Often in these cases, the loan sharks would put a higher amount upfront with accordingly even more exorbitant interest rates. On the whole, the illegal moneylender’s side is driven by none other than blind greed whereas the borrowers are largely in desperate situations and financially vulnerable.
Briefly looking at what if at all the advantages of borrowing money from these illegal moneylenders are and more importantly the disadvantages, we can arrive at the following :
- The only advantage is that they may be able to provide the money under dire need
Regardless of what someone may be driven to say about loan sharks being a misunderstood bunch, it serves us well to look at how the risks far outweigh the benefits. Think about it this way, if you were ready for the repayments, you would be looking for the proper financial instruments in the first place since you want accountability.
- Consider the following disadvantages
i) While banks adhere to a base lending rate, the repayment scheme to loan sharks is chaotic at best and can fluctuate in terms of frequency and interest rate(which can be 20 to 30 times more than conventional charges). The loans they give out are also usually only short-term since otherwise it increases risk tremendously on their part.
ii) There are no real terms and conditions. Especially since they are lending money as an unlicensed party, they really have no regulations to abide by.
iii) Loan sharks don’t have any appraisal process for the loan contract and hence use the uncontrolled rates to cover for the lack in security for their loan. This is also the reason that they easily award small loans to large numbers of clients whereby they spread their risk
iv) Their manner of advertising is haphazard and often rudimentary. In many Asian countries where there aren’t strict regulations against public posters, they stick vaguely illustrated advertisements that contain little more than a phone number onto street-lighting posts and roadside walls. Their need to remain anonymous in most cases deserves scrutiny
v) Loan sharks lack accountability since they don’t report to the relevant authorities who might check or evaluate their credit standings and provide needed information for consumers. This indirectly makes all your loans issued entirely on their terms.
A consumer credit licence which can be considered the basic requirement for money lending activities in most countries usually has several prerequisites and will be outside the forte of loan sharks. Nevertheless, there may be some places where they are able to legalize their activities by getting these licences under ‘less stringent’ conditions through loopholes in the law. It enables them to put up a little board at their premises to say that they represent an authorized money lending facility. For instance, a pawning facility or pawn shop(which is often legal due to having to account for pawned items) can double as a place to get illegal loans. This may also allow the loan shark to have a broader customer base and target higher income groups rather than just marginal wage earners. On a much larger scale of operations, these pawn shops or similar 'credit establishments' grow enough to come under the newer paradigm of shadow banking as can be seen in China. The essential nature of their operations does not however change and they still largely set their own rules.
Online Loan Sharks
The Internet seems to have acted as a double-edged sword in solving the loan shark problem. On the one hand, it enables people to look for credit resolution options and advice in their country without having to travel far. On the other, it has resulted in the proliferation of online loan sharks who conveniently put up websites to trade their wares. They can even rephrase the term to something less demeaning such as ‘high risk lenders’. Being online also can give an additional level of anonymity for them. One has to be even more cautious of what one is getting into with such a veil in place for there is no telling what real network is working underneath for these online sharks.
Loan sharks around the world
In Southeast Asia, loan sharks are well-known under such names as ‘Ah Long’ and have created untold misery among many families. A common trait among the runners(as the debt-collecting representatives are called) is to spray or throw red paint on the external walls of debtors’ dwellings. There are several cases of family breadwinners eloping to escape the torment of the runners and afterwards the family continues to receive the harassment. A few cases end in suicide. Usually citizens resort to a complaints bureau set up as part of the government assistance to fight the issue but this only takes care of individual cases.
In South Africa, illegal money lending is a huge problem especially in mining circles as the miners were always poorly paid . The Micro Finance Regulatory Council(MFRC) backed by the formal banking system was set up to create accredited moneylenders to specifically fight the problem of proliferation of loan sharks but still has many challenges ahead.
In South America, financial illiteracy and nonchalant attitudes towards interest rates already create an atmosphere conducive to loan shark practices. Some of the countries here have among the highest inflation rates and excessive credit consumption that the true effects of short-term credit from loan shark practices have yet to be felt deeply.
Better finance solutions - Credit Unions and Microfinance
Knowing the situation of the borrower in dire need, it is insensitive and probably useless to ask them to seek established financial institutions like banks or finance companies. A number of better ways can be resorted to such as :
- Seeking Friends and Family
If possible, it is best to try to go to relatives and friends that have closeness and good understanding with the potential debtor. They can be compromising under pressing conditions and don’t charge interest.
- Seeking Not-for-Profit Organizations
Places like credit unions and social welfare type establishments have built up lending policies that are reasonable. For example, one could take a payday loan from credit unions instead of from a so-called legal loan shark(which are payday loan moneylenders with exorbitant rates).
- Microfinance and Microcredit
Microfinance, which is about financial services for the poor was made popular by Muhammad Yunus, a Bangladeshi banker and economist who won the 2006 Nobel Peace Prize for it. In essence, his was the pioneering effort in enabling even extremely poor people to finance their self-development through very small loans. Hence, the micro credit business model was proven to be a viable one. Yunus’ bank for the poor, the Grameen Bank, funded the borrowers. This model was expanded to many developing countries and a few developed countries including the USA. Such instruments may be available in your country.
Today if you read the online introductory phrases on some loan shark websites, it’s as if they already assume that you are specifically looking for a loan shark if your situation is dire enough. The level of their confidence is astounding that it goes to show how weak the alternatives are. Hence, the only way to discourage “loan shark-ism” is to strengthen the availability of those alternative financial instruments to help those who will always be in need.
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