A
loan shark is a person or body that offers
unsecured loan- Definition :An unsecured loan is a loan that is not backed by collateral. Also known as a signature loan or personal loan.Unsecured loans are based solely upon the borrower's credit rating. As a result, they are often much more difficult to get than a secured loan, which also factors in the...
s at high
interest rateAn interest rate is the price a borrower pays for the use of money they do not own, for instance a small company might borrow from a bank to kick start their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower...
s to individuals, often backed by
blackmailBlackmail is the crime of threatening to reveal substantially true information about a person to the public, a family member, or associates unless a demand made upon the victim is met. This information is usually of an embarrassing and/or socially damaging nature...
or threats of
violenceViolence is the expression of physical or verbal force against self or other, compelling action against one's will on pain of being hurt. Variant uses of the term refer to the destruction of non-living objects . Worldwide, violence is used as a tool of manipulation and also is an area of concern...
.
Throughout history,
usuryUsury originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate...
laws made loan sharks commonplace. Many
moneylenders skirted between legal and extra-legal activity. In the recent
western worldThe Western world, also known as the West and the Occident , is a term that can have multiple meanings depending on its context...
, loan sharks have been a feature of the
criminal underworldOrganized crime or criminal organizations can be defined as a transnational grouping of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for the purpose of generating a monetary profit...
, but are otherwise rare. Loan sharks are common in the UK and among the
ItalianItaly , officially the Italian Republic , is a country located on the Italian Peninsula in Southern Europe and on the two largest islands in the Mediterranean Sea, Sicily and Sardinia. Italy shares its northern, Alpine boundary with France, Switzerland, Austria and Slovenia...
Cosa Nostra and Triads in
ChinaChina is a cultural region, an ancient civilization, and, depending on perspective, a national or multinational entity extending over a large area in East Asia....
.
History
The phrase "loan shark" came into usage in the United States late in the nineteenth century to describe a certain type of
predatory lenderPredatory lending is a pejorative term used to describe unfair, deceptive, or fraudulent practices of some lenders during the loan origination process...
. The lenders to whom these epithets were applied charged high rates of interest and designed their credit products in such a way as to make orderly retirement of the debt difficult. Borrowers became trapped by their loans and were unable to pay off the principal. The interest payments dragged on and many borrowers became virtual debt
peonThe words peon and peonage are derived from the Spanish peón . It has a range of meanings but its primary usage is to describe labourers with little control over their employment conditions.-Spanish usage:...
s. As Cobleigh explains, "The real aim of loan sharks is to keep their customers eternally in debt so that interest (for the sharks) becomes almost an
annuityAnnuity may refer to:* Annuity any recurring periodic series of payments* Life annuity: a financial contract providing payments for a person's lifetime* Annuity...
."
Today loansharking tends to be associated in the popular mind with
organized crimeOrganized crime or criminal organizations can be defined as a transnational grouping of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for the purpose of generating a monetary profit...
. The stereotypical loan shark is often thought to be a gangster who extorts repayment of the debt with threats of physical brutality. Such loan sharks do exist, but the first loan sharks were not linked to crime families and they did not beat up delinquent debtors. The phrase was originally applied to salary and chattel mortgage lenders who operated at the turn of the twentieth century. These creditors dealt in small sums (most loans were less than $100) and they charged high rates of interest (between 10% and 20% a month, and sometimes more). Many of these cash advances were interest-only and required a lump-sum payment to retire the principal. As a result, loans that were supposed to be short term often dragged on for months and years. To pay one lender, the debtor often took out another loan in a process that was called "pyramiding." The loan sharks frequently colluded in encouraging this expanding chain of debt.
To compel repayment, the first loan sharks secured their cash advances with chattel mortgages or wage assignments. A chattel mortgage entitled the lender to repossess household goods in case of default. A wage assignment gave the lender an enforceable claim on the debtor’s next wage payment. Because many employers at that time made it a policy to discharge employees against whom a wage assignment was filed, this instrument of security was especially effective in coercing debtors to keep making their payments.
Loan sharks tended to proliferate in big cities where there were large numbers of wage workers with regular paydays but modest salaries. These lenders operated out of cheap storefront offices and catered especially to government employees, factory hands, and office clerks. In the early decades of the twentieth century, it was estimated that one in five urban households in the United States borrowed from the loan sharks.
Newspapers after the turn of the century were filled with stories about the plight of debtors who were being mauled by the loan sharks. Before the First World War, a progressive coalition emerged to fight on behalf of these consumers. This fight culminated in the drafting of the Uniform Small Loan Law, which brought into existence a new class of licensed lender. The model statute mandated consumer protections and capped the interest rate on loans of $300 or less at 3.5% a month or the equivalent of 42% a year. Its aim was to establish a reputable class of lenders that could satisfy the demand of loan shark victims at a substantially reduced rate. The law was enacted, first in several states in 1917, and was adopted by all but a handful of states by the middle of the twentieth century.
Mafia links
Although the reform law was intended to starve the loan sharks into extinction, this species of predatory lender survived and evolved. After high-rate salary lending was outlawed, some bootleg vendors recast the product as "salary buying." They claimed they were not making loans but were purchasing future wages at a discount. This form of loansharking proliferated through the 1920s and into the 1930s until a new draft of the Uniform Small Loan Law closed the loophole through which the salary buyers had slipped. Salary-buying loan sharks continued to operate in some southern states after World War Two because the
usury rateUsury originally meant the charging of interest on loans. This would have included charging a fee for the use of money, such as at a bureau de change. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate...
was set so low that licensed personal finance companies could not do business there.
Organized crime began to enter the cash advance business in the 1930s, after high-rate lending was criminalized by the Uniform Small Loan Law. The first reports of mob loansharking surfaced in
New York CityNew York is the most populous city in the United States, and the center of the New York metropolitan area, which is among the most populous urban areas in the world. A leading global city, New York exerts a powerful influence over worldwide commerce, finance, culture, fashion and entertainment...
in 1935, and for 15 years, underworld money lending was apparently restricted to that city. There is no record of syndicate "juice" operations in Chicago, for instance until the 1950s. In the beginning, underworld loansharking was a small loan business, catering to the same populations served by the salary lenders and buyers. Those who turned to the bootleg lenders could not get
creditCredit is the provision of resources by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources at a later date. It is any form of deferred payment...
at the licensed companies because their incomes were too low or they were deemed poor risks. The firms operating within the usury cap turned away roughly half of all applicants and tended to make larger loans to married men with steady jobs and decent incomes. Those who could not get a legal loan at 36% or 42% a year could secure a cash advance from a mobster at the going rate of 10% or 20% a week for small loans. Since the mob loans were not usually secured with legal instruments, debtors pledged their bodies as collateral.
In its early phase, a large fraction of mob loansharking consisted of payday lending. Many of the customers were office clerks and factory hands. The loan fund for these operations came from the proceeds of the numbers racket and was distributed by the top bosses to the lower echelon loan sharks at the rate of 1% or 2% a week. The 1952
B-flickA B movie is a low-budget commercial motion picture conceived neither as an arthouse film nor as pornography. In its original usage, during the so-called Golden Age of Hollywood, the term more precisely identified a film intended for distribution as the less-publicized, bottom half of a double...
"Loan Shark," starring George Raft, offers a glimpse of mob payday lending. The waterfront in Brooklyn was another site of extensive underworld payday advance operations around mid-century.
Over time, mob loan sharks moved away from such labor intensive rackets. By the 1960s, the preferred clientele was small and medium sized businesses. Business customers had the advantage of possessing assets that could be seized in case of default, or used to engage in fraud or to launder money. Gamblers were another lucrative market, as were other criminals who needed financing for their operations. By the 1970s, mob salary lending operations seem to have withered away in the United States.
At its height in the 1960s, underworld loansharking was estimated to be the second most lucrative franchise of organized crime in the United States after illegal gambling. Newspapers in the 1960s were filled with sensational stories of debtors beaten, harassed, and sometimes murdered by mob loan sharks. Yet careful studies of the business have raised doubts about the frequency with which violence was employed in practice. Relations between creditor and debtor could be amicable, even when the "vig" or "juice" was exorbitant, because each needed the other. FBI agents in one city interviewed 115 customers of a mob loan business but turned up only one debtor who had been threatened. None had been beaten.
Organized crime has never had a
monopolyIn economics, a monopoly exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it...
on black market lending. Plenty of vest-pocket lenders operated outside the jurisdiction of organized crime, charging usurious rates of interest for cash advances. These informal networks of credit rarely came to the attention of the authorities but flourished in populations not served by licensed lenders. Even today, after the rise of corporate payday lending in the United States, unlicensed loan sharks continue to operate in immigrant enclaves and low-income neighborhoods. They lend money to people who work in the informal sector or who are deemed to be too risky even by the check-cashing creditors. Some beat delinquents while others seize assets instead. Their rates run from 10%-20% a week, just like the mob loan sharks of yesteryear.
Non-Standard Lenders in the United States
In the United States, there are lenders licensed to serve borrowers who cannot qualify for standard loans from mainstream sources. These smaller, non-standard lenders often operate in cash, whereas mainstream lenders increasingly operate only electronically and will not serve borrowers who do not have bank accounts. Terms such as sub-prime lending, "non-standard consumer credit", and
Payday loanA payday loan is a small, short-term loan that is intended to cover a borrower's expenses until his or her next payday. The loans are also sometimes referred to as cash advances, though that term can also refer to cash provided against a prearranged line of credit such as a credit card...
s are often used in connection with this type of
consumer financeConsumer finance in the most basic sense of the word refers to any kind of lending to consumers. However, in the United States financial services industry, the term "consumer finance" often refers to a particular type of business, sub prime branch lending...
. The availability of these products has made illegal, exploitative loan sharks rarer, but these legal lenders have also been accused of behaving in an exploitative manner. For example, payday loan operations have come under fire for charging inflated "service charges" for their services of cashing a "payday advance", effectively a short-term (no more than one or two weeks) loan for which charges may run 3-5% of the principal amount. By claiming to be charging for the 'service' of cashing a paycheck, instead of merely charging interest for a short-term loan, laws which strictly regulate moneylending costs can be effectively bypassed.
Payday Lending
Licensed payday advance businesses, which lend money at high rates of interest on the security of a postdated check, are often described as loan sharks by their critics due to high interest rates that trap debtors, stopping short of illegal lending and violent collection practices. Today’s payday loan is a close cousin of the early twentieth century salary loan, the product to which the "shark" epithet was originally applied, but they are now legalised in some states.
Yamikinyu in Japan
The regulation of moneylenders is typically much looser than that of banks. In Japan, the Moneylending Control Law requires only registration in each
prefectureThe prefectures of Japan are the country's 47 sub-national jurisdictions: one "metropolis" , Tokyo; one "circuit" , Hokkaidō; two urban prefectures , Osaka and Kyoto; and 43 other prefectures . In Japanese, they are commonly referred to as...
. In
Japanis an island country in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, People's Republic of China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...
, as the decade-long depression lingers, banks are reluctant to spare money and regulation becomes tighter, illegal moneylending has become a social issue. Illegal moneylenders typically charge an interest of 30 or 50 % in 10 days (in Japanese, these are called "to-san" ('to' meaning ten and 'san' meaning three) or "to-go" ('to' meaning ten and 'go' meaning five)), which is about 1800 % per annum. This is against the law that sets the maximum interest rate at 29.2 %. They usually do business with those who cannot get more money from banks, legitimate consumer loans, or credit cards.
Ah Long in Malaysia and Singapore
Ah Long (derived from the Cantonese phrase '大耳窿' (Jyutping: daai6 ji5 lung1) is a term for illegal loan sharks in
MalaysiaMalaysia is a country in Southeast Asia that consists of thirteen states and three Federal Territories, with a total landmass of . The capital city is Kuala Lumpur, while Putrajaya is the seat of the federal government. The population stands at over 28 million inhabitants...
and
SingaporeSingapore , officially the Republic of Singapore, is an island city-state located at the southern tip of the Malay Peninsula, lying north of the equator, south of the Malaysian state of Johor and north of Indonesia's Riau Islands. At , Singapore is a microstate and the smallest nation in Southeast...
. They lend money to people who are unable to obtain loans from banks or other legal sources, mostly targeting habitual gamblers. They charge a very high interest rate (about 40% per month/fortnight which equals 1422%/33087% per annum due to the constantly compounding interest.) and frequently threaten
violenceViolence is the expression of physical or verbal force against self or other, compelling action against one's will on pain of being hurt. Variant uses of the term refer to the destruction of non-living objects . Worldwide, violence is used as a tool of manipulation and also is an area of concern...
(and administer it) towards those who fail to pay in time.
Many years ago, prior to the registration of mobile phone numbers in Malaysia, Ah Longs advertised their services merely by distributing their calling cards.
Ah Long Tactics
When a person fails to pay in time, the Ah Long will spray, splash, or write threats in red paint on the walls of the house or property of that person as a threat of violence and to shame the borrower into repaying the loan. A common use of painting includes the characters "O$ P$" meaning "Owe money, Pay money". According to local police authorities, there have been cases where borrowers were beaten or had their property damaged or destroyed, and some victims have committed suicide.
Pig heads are sometimes hung outside the borrower's house, as a form of intimidation as well as a way of 'marking' the person as a loan 'defaulter'.
Ah Longs sometimes break into victim's houses and steal items of the loans value. This method is commonly used to save time and also effort.
Recent cases shows that Ah Longs also displays the borrower's identity card on a huge banner and post it on fences. Since Ah Longs need only an identity card from borrowers, this tactic is becoming common because it shames the borrower publicly into paying up.
Pacific Loan Sharking in New Zealand
In New Zealand, there is a vibrant industry in loan sharking in communities with large numbers of poor Pacific Island migrants (Mostly Samoan, Tongan, and Niuean migrants). Most of the migrants are likely to be unemployed or work menial jobs. Loan sharks have legitimate shops in commercial centres of poorer parts of Auckland and Wellington. These shops are often run by other Islanders or other immigrants (Indian and Chinese). Many people of other ethnicities use these shops too (usually poorer and more disadvantaged people) and the shops charge exorbitant amounts of interest (usually 30-200% a year and charge last documentation fees; registration fees; and, in one extreme case, $30 for a phone call. These sharks have been condemned for years but people use them as they are totally legal. They will get prosecuted only over producing badly worded contracts. Often borrowers can not speak English well, have no bank account, and can not understand the terms of their loan contract. Often, excessive penalties are charged even for slight defaults on payment. The result is people spend years and thousands of dollars paying off a loan that initially cost a few hundred dollars. The companies can be family run, and one Tongan company even shows photos of defaulters in the Tongan Newspaper as part of naming and shaming that is part of that culture. Huge church and social financial commitments (Such as loans for funerals) can make the moneylender a part of life. The New Zealand government is trying to pass legislation to make these companies not to loan money to people who can not pay the loan back. These companies also advertise extensively, and, in the worst case in 2007, people from a well known finance company went around from door to door in the poor suburb of Otara offering high interest cash loans.
Even worse are several pawn shop style companies that offer to sell cheap appliances and cars as part of loans, which often defective and in the case of vehicles unsuitable for road use. A usual reason for borrowing is to pay for basic necessities like food and clothing. Even worse are Pacific Islanders forced to borrow money to pay donations and money to support their ministers. An extreme case was in 2004, when a Samoan minister in a poor suburb of Wellington forced his parishioners to come up with $500NZ spending money from each family, or they were no longer welcome at church. It turned out the minister was going to a conference in Samoa which had been totally paid for by the parishioners. He had to back down after the media got involved. These people are already broke after sending money home to support relatives.
Another component is offering security, often family heirlooms like shields, kava bowl,s and fine mats are security for small amounts, but larger ones can incur cars and even houses, the most extreme case being an Indian loan shark taking a house over for a default on a $900 loan.
Poor suburbs are littered with advertising and even well-known sub-bank companies use Pacific motifs in their advertising and offer easy terms, poor spelling language, and even jive talk.
External links