A loan shark is a person who offers loans at interest rates that are extremely high or illegal, has strict terms of collection, and generally operates outside the law, often using the threat of violence or other illegal, aggressive, and extortionate actions when seeking to enforce the satisfaction of the debt. As a consistent or repeated illegal business operation or "racket", loan sharking is generally associated with organized crime and certain criminal organizations.
Description
Because loan sharks operate mostly illegally, they cannot use the legal system to collect their debts; therefore they often resort to enforcing repayment by terms of blackmail and threats of violence. Historically, many moneylenders skirted between legal and criminal activity. In the recent Western world, loan sharks have been a prominent feature of the criminal underworld.
Loan sharking is sometimes conflated with lawful high interest predatory lending services such as payday or title loans..Contemporary Financial Intermediation, Stuart I. Greenbaum and Anjan V. Thakor, Academic Press, 2007, page 75, .When Payday Loans Go Wrong, Steve Perry, Pneuma Springs Publishing, 2011, . A key difference between loan sharking and predatory lending is that lenders engaged in the latter practice generally stay within the law when making and collecting loans, and thus the debate on such practices often focuses on whether they are ethical as opposed to whether they are legal. However, laws regulating lending practices vary so widely between jurisdictions (even in the same country, particularly between states in the United States) that particular practices that might be technically legal (if arguably unethical) "predatory lending" in one jurisdiction might be considered illegal "loan sharking" if attempted in an identical manner in a different locale.
Japan
Regulation of moneylenders is typically much looser than that of banks. In Japan, the Moneylending Control Law requires only registration in each prefecture. In Japan, as a decades-long economic depression lingers, banks are reluctant to loan money and regulation has become tighter, meaning illegal moneylending has become a social issue. Illegal moneylenders typically charge interest of 30 or 50% in 10 days (in Japanese, these are called "to-san" ( 10-3) or "to-go" ( 10-5)), which correspond to effective interest rates of about 1.442 million percent and 267.5 million percent per annum respectively. This is against the law that sets the maximum interest rate at 20%."Lenders of first resort", The Economist, 22 May 2008. Accessed 23 September 2014. These lenders usually do business with those who cannot get more money from banks, legitimate consumer loans, or credit cards.
Ireland The Central Bank of Ireland was criticized for doing nothing to protect those with low incomes, the vulnerable or those who have low levels of financial literacy from loan sharks, when it emerged in 2015 that up to 100,000 of the 360,000 loans given by Irish moneylenders violated the law.
Israel Loan sharking is one of the main activities of the Israeli mafia.
Kazakhstan The National Bank of Kazakhstan has been consistently fighting loan sharks since 2018. Thus, the maximum interest rate on a loan was limited to no more than 100% of the loan amount.
In 2020, a financial market regulation agency was separated from the National Bank of Kazakhstan to monitor the rights and legitimate interests of borrowers, to identify and eliminate systemic problems of the financial sector of the economy. A unified state register of microfinance organizations was introduced to legalize lenders.
Malaysia and Singapore
Ah Long (derived from the Cantonese phrase ('big ear hole')) is a colloquial term for illegal loan sharks in Malaysia and Singapore. They lend money to people who are unable to obtain loans from banks or other legal sources, mostly targeting habitual gamblers. Often, they discreetly advertise by sticking notices, mostly on lamp posts and utility boxes around a neighbourhood, thus vandalising public property, as authorities must remove such advertisements. They charge high interest rates (generally about 40% per month/fortnight) according to Anti-Crime, Drug and Social Development Voluntary Organisation and frequently threaten violence (and administer it) towards those who fail to pay on time.
Ah Long tactics When a person fails to pay on time, the Ah Long will set on fire, spray paint, lock up gates, splash, or write threats in paint or markers on the walls of the property of that person as a threat of violence and to scare, and perhaps shame, the borrower into repaying the loan. A common use of painting includes the characters "O$P$" meaning "owe money, pay money", as well as the debtor's unit number. According to local police authorities, there have been cases where borrowers and their family members were beaten or had their property damaged or destroyed, and some victims have committed suicide.
New Zealand During the early COVID-19 pandemic in 2020, the New Zealand Government launched a crackdown against loan sharks to ease economic hardship. Commerce Minister Kris Faafoi announced that the Credit Contracts Legislation Amendment Act 2020 was due to come into force on 1 June 2020, but the legislation was fast-tracked to 1 May due to "the disruption and financial concerns caused by COVID-19". Under the new law, high-interest lenders charging interest at 50% or more would not be allowed to charge interest as well as fees over 100% of the amount loaned to borrowers. In addition, compound interest on high interest loans was banned while fees for defaulting on payments were capped. By June 2024, figures released by the Ministry of Business, Innovation and Employment showed that no customers had been granted high-cost loans in 2023.
Russia Several organizations regulate the loan market in Russia, including:
Central Bank RosComNadzor Self-regulated industry organization MIR
In 2024, the Central Bank planned to impose higher requirements on loan loss provisions for loans with a full value of 250% or more.
Vietnam Loan sharks in Vietnam are widespread, particularly in densely populated areas and around industrial parks. They often target poor workers and gamblers, advertising their services on walls, utility poles, and through online platforms such as Facebook and Google. Their operations range from pawn shops to online lending via illegal applications. Many of these networks are not controlled by Vietnamese citizens inside the country but are instead operated by Vietnamese living in Cambodia or Chinese groups. Loan sharks typically impose extremely high interest rates, ranging from 240% to 670% annually, with some cases reported at up to 1000% per month. Borrowers usually take relatively small loans, often below 10 million VND, but due to compounding interest, they end up owing far more than they would through official credit channels. When debtors fail to repay, loan sharks often force them to take out new loans to cover old debts, and if payments remain overdue, they resort to intimidation tactics such as sending threatening messages, vandalizing property, throwing waste or chemicals, and in some cases kidnapping or physical assault. In recent years, the Vietnamese government has intensified crackdowns on illegal lending networks and encouraged citizens not to borrow from unofficial sources, while reminding that under Article 201 of the Penal Code, usury in civil transactions is a criminal offense punishable by fines or imprisonment depending on the illicit profits gained.
United Kingdom
Research by the government and other agencies estimates that 165,000 to 200,000 people are indebted to loan sharks in the United Kingdom. Illicit loan sharking is treated as a high-level crime by law enforcement, due to its links to organized crime and the serious violence involved. Payday loans with high interest rates are legal in many cases, and have been described as "legal loan sharking" (in that the creditor is legally registered, pays taxes and contributions, and can reclaim remittance if taking the case to adjudication; likewise there is no threat of harm to the debtor).Simon Edge, 15 November 2012
United States 19th-century salary lenders In the late 19th-century US, low legal interest rates made small loans unprofitable, and small-time lending was viewed as irresponsible by society. Banks and other major financial institutions thus stayed away from small-time lending. There were, however, plenty of small lenders offering loans at profitable but illegally high interest rates. They presented themselves as legitimate and operated openly out of offices. They only sought customers who had a steady and respectable job, a regular income and a reputation to protect. This made them less likely to leave the area before they paid their debt and more likely to have a legitimate reason for borrowing money. Gamblers, criminals, and others who were disreputable or likely to be unreliable were avoided. They made the borrower fill out and sign seemingly legitimate contracts. Though these contracts were not legally enforceable, they at least were proof of the loan, which the lender could use to blackmail a defaulter.Haller & Alviti (1977)
To force a defaulter into paying, the lender might threaten legal action. This was a bluff, since the loan was illegal. The lender preyed on the borrower's ignorance of the law. Alternatively, the lender resorted to public shaming, exploiting the social stigma of being in debt to a loan shark. They were able to complain to the defaulter's employer, because many employers would fire employees who were mired in debt, because of the risk of them stealing from the employer to repay debts. They were able to send agents to stand outside the defaulter's home, loudly denouncing him, perhaps vandalizing his home with graffiti or notices. Whether out of gullibility or embarrassment, the borrower usually succumbed and paid.
Many customers were employees of large firms, such as railways or public works. Larger organizations were more likely to fire employees for being in debt, as their rules were more impersonal, which made blackmail easier. It was easier for lenders to learn which large organizations did this as opposed to collecting information on the multitude of smaller firms. Larger firms had more job security and the greater possibility of promotion, so employees sacrificed more to ensure they were not fired. The loan shark could also bribe a large firm's paymaster to provide information on its many employees. Regular salaries and paydays made negotiating repayment plans simpler.Loansharking in American Cities. p. 154.
The size of the loan and the repayment plan were often tailored to suit the borrower's means. The smaller the loan, the higher the interest rate was, as the overhead (costs) of tracking and pursuing a defaulter did not depend on the size of the loan. The attitudes of lenders to defaulters also varied: some were lenient and reasonable, readily granting extensions and slow to harass, while others unscrupulously tried to milk all they could from the borrower (e.g. imposing late fees).
Because salary lending was a disreputable trade, the owners of these firms often hid from public view, hiring managers to run their offices indirectly. To further avoid attracting attention, when expanding his trade to other cities, an owner would often found new firms with different names rather than increasing the visibility and recognizability of his existing firm.
The penalties for being an illegal lender were mild. Illegal lending was a misdemeanor, and the penalty was forfeiture of the interest and perhaps the principal as well. But these punishments were only ever imposed if the borrower sued, which they typically could not afford to do.