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Lender Sharks vs. Payday Lenders

Meaning of the lender shark

A loan shark offers easy credit to borrowers at unreasonably high-interest rates. These lenders usually trap poor borrowers who are desperate for immediate cash. They take advantage of exorbitant rates and unethical debt collection vehicles.

Loan sharks are usually unlicensed, unregulated, and illegal business entities or individuals. Many of them are part of organized criminal groups. The interest rates exceed the legally permitted rates, sometimes reaching a maximum of 1.5% per day.

Key points to remember

  • Loan sharks are usually unregistered lenders (individuals or businesses) who charge high-interest rates on slow money.
  • These loan sharks do not require a guarantor, real estate mortgage, or detailed documents from the borrower. They do not review the customer’s credit rating or conduct any background investigations.
  • They have no code of conduct and threaten borrowers to recover the amount before the due date.
  • The loan contract concluded often contains hidden clauses and is not legally enforceable.

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How do Sharks Loans work?

Some borrowers find it difficult to obtain a loan from approved lenders. Often disadvantaged borrowers who do not have a good credit rating or a stable bank balance turn to informal networks for loans. Many unregistered and illegal lenders hide in the shadow of informal lending.

Loan sharks are usually unregistered moneylenders who take unfair advantage of the needy in their neighborhood. They provide instant credit even to high-risk borrowers who lack proper documentation and cannot provide a collateral asset.

Loan sharks appear polite and convincing when making a deal. However, they charge unreasonably high-interest rates, which a desperate borrower often accepts. If the borrower fails to discharge the debt, these money merchants force him to repay by adopting violent means.

Are lenders illegal?

According to the renowned book Loan Sharks: The Birth of Predatory Lending, this practice was widespread in the United States from the Civil War to the early 20th Century. The brutality of money lenders has led the media to draw the analogy of sharks preying on their victims. The funds thus offered often came from mysterious sources. The police crackdown uncovered several predatory moneylenders working as part of organized crime.

Numerous reports suggest that criminal groups have profited from human trafficking, drug sales, and money laundering. Illegal sources of funds funded loans from unsuspecting needy borrowers at exorbitant rates.

While offering a large sum of loans, predatory lenders hardly follow any rules or regulations. They took the most considerable risk by not doing credit analysis and slow without collateral. Nor has the customer’s background been checked as other licensed lenders do. They tracked and harassed the customer for debt collection before the due date or after the repayment.

Over the years, governments have passed laws and acts to control illegal lending and penalize offenders. For example, loan sharking is a criminal offense in Canada. Bernie Sanders had proposed legislation to cap interest charged by credit cards at 15% in 2019. Law enforcement officers continue to bust illegal loan rackets to prevent the exploitation of victims.

Many regulated short-term credit providers also charge unreasonable interest rates, such as payday loans. Some experts suggest doing a background check before borrowing money. If the lending company or individual is not registered, it most likely falls within the loan sharking definition and limits. Some countries have rolled out an anonymous hotline number to report predatory lenders.

Loan shark recovery mechanisms

Since predatory lenders induce borrowers to enter into an agreement that is not legally enforceable, they have no legitimate right to recover their money. Therefore, they usually resort to some of the following unethical practices:

  • Blackmail
  • stalking
  • Sending threats
  • To harass the defaulter
  • Engage in acts of violence
  • Defame and dishonor the defaulter
  • Vandalize the house with graffiti or notices
  • Complain to the employer of the defaulter
  • Send henchmen to warn the defaulter
  • Abduction of family members
  • Oblige to take more debts to erase the previous ones

To fight against illegal moneylenders, experts suggest erring on the side of caution. Debtors should report to the police any misconduct or violence committed by such a lender. Additionally, many companies help debtors overcome harassment from predatory lenders.


This NY Times report details the harrowing account of a woman in Japan who owed considerable debts to loan sharks. The woman first borrowed $200, which became a debt of $40,000 overtime, split among many lenders.

The 1983 article further mentions that loan sharks increased twice since 1982 in Japan, reaching 43,000. They operated in small shops, while some were linked to gangsters. They dispensed $1250 in just 20 minutes without requiring any collateral.

The only prerequisite was the health insurance card to identify the borrower. Predatory lending outlets were so plentiful in 1982 that four of them would be the largest consumer loan lender, surpassing Japanese banks. A study had cited that a typical borrower in Japan paid $3,000 in interest to loan sharks at the time.

It is common in Asian countries, with reports frequently covering the crackdowns. Illegal loans have increased in response to the pandemic and the lack of job opportunities. Cyber ​​loan sharks use the internet and social media to entrap, threaten and blackmail people in debt.

Lender Sharks vs. Payday Lenders

Loan sharks are often illegitimate lenders who operate outside the regulations of any government agency. In contrast, payday lenders are legitimate lenders regulated by the state government.

The former lends without a borrower’s credit assessment and pays no attention to their eligibility. However, the latter follows a process of applying for credit and sanctions funds after analyzing customers’ praise and checking eligibility.

Although these two money merchants offer funds to loan seekers at high-interest rates, they are worlds apart. Moreover, it is surprising that predatory lenders can illegally charge more than 100% interest. A payday lender can legally charge up to 400% interest per year.

In the event of non-payment by borrowers, loan sharks often threaten or harass them. On the other hand, payday lenders usually go the ethical route by complaining against defaulters in the credit bureaus.

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