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Loan sharks versus payday lenders and other alternative lenders

What is a loan shark?

A loan shark is a person who – or an entity that – lends money at highly high-interest rates and often uses threats of violence to collect debts. Interest rates are usually well above an established legal speed, and loan sharks are often members of organized criminal groups.

Loan sharks charge borrowers interest usually well above any established legal rate; even in a severe liquidity shortage, there are alternatives.

How a loan shark works

A loan shark can be part of a personal or professional network offering loans at high-interest rates. They can be found in underbanked neighborhoods, on the internet, or through private networks. Their funds usually come from unidentified sources, and they work for personal businesses or unregistered entities.

Loan sharks do not require background checks or credit reports. They lend large sums of money, intending to earn high interest in a short time. Loans from loan sharks carry interest rates well above any regulated rate. For example, a loan shark may lend $10,000 to a person, guaranteeing the repayment of $20,000 within 30 days. These lenders can also often demand that the debt be repaid at any time, using violence as a means to force repayment.

In most cases, business dealings with a loan shark are illegal; it is better to look for other alternatives.

Key points to remember

  • Loan sharks lend money at extremely high-interest rates and often use threats of violence to recover their debts.
  • They are often members of organized crime syndicates.
  • Payday lenders are similar to loan sharks in many ways, but they operate entirely legally.

Loan sharks versus payday lenders and other alternative lenders

Some payday lenders can approach the level of loan sharks, offering loans at highly high-interest rates for short periods. However, these rates may be completely legal. Standard usury laws generally dictate the maximum interest rates a lender can charge in each state, up to around 45%. Payday lenders often enjoy exceptions, charging up to 400% annual interest rates. They can offer such high speeds due to special provisions provided by state governments. Loan sharks generally charge higher rates than payday lenders.

Payday lenders are a legal form of high-interest loan available to borrowers. These are usually registered entities that follow standard credit application procedures, requesting personal information for a credit check. Payday lenders also require proof of employment and income. Payday lenders generally base the principal offered on the borrower’s income and credit profile.

While payday lenders are not known for their violent debt collection tactics, they offer short-term payday loan rates with extremely high-interest charges, making repayment difficult for the borrower. Payday lenders generally follow standard collection procedures for defaults, reporting missed payments and defaults to credit bureaus.

Other alternative lenders have appeared on the credit market to offer individuals and businesses credit alternatives. These lenders provide alternative products compared to traditional loans. Many of these loans will have lower borrowing standards, making credit more affordable for a more significant portion of the population. Loan application procedures will generally be similar to conventional loans. However, loan applications are usually automated, and lenders are prepared to work with borrowers in the event of a dispute. These lenders can offer variable principal amounts and interest rates to various borrowers.

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